Determinants of Interest Rate Spreads in Solomon Islands
IMF Working Papers, June 12, 2014
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Bibliographic details
- Authors: Nooman Rebei
- Published: June 12, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498303651.001
Summary
- Bank interest rate spreads in Solomon Islands are high by regional standards.
- The paper examines determinants of bank interest rates including bank specific, banking sector, macroeconomic, and legal indicators.
- The results show that the scale of operation, overhead costs, concentration index, and some macroeconomic variables (i.e., monetary policy rates and real growth) significantly influence interest rate margins.
- The paper particularly focuses on the influence of the banking sector structure and finds strong evidence of bank collusion.
Key findings
- Scale of operation significantly influences interest rate margins.
- Overhead costs are a significant determinant of interest rate spreads.
- Concentration index (banking sector structure) is significantly associated with interest rate margins.
- Some macroeconomic variables—specifically monetary policy rates and real growth—significantly influence interest rate margins.
- Strong evidence of bank collusion is found when focusing on the banking sector structure.
Policy implications and analytical focus
- Addressing high overhead costs and expanding the scale of operations may reduce interest rate spreads.
- Monitoring and addressing market concentration is critical given evidence suggesting collusive behavior among banks.
- Macroeconomic policy settings (monetary policy rates and measures to support real growth) are relevant levers for influencing interest rate margins.
- Legal and regulatory indicators were included in the analysis alongside bank specific, banking sector, and macroeconomic variables.