Why Have Bank Interest Margins Been so High in Indonesia Since the 1997/1998 Financial Crisis?

29 Pages Posted: 2 Sep 2013

See all articles by Irwan Trinugroho

Irwan Trinugroho

Université de Limoges, LAPE

Agusman Agusman

Bank Indonesia

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: August 8, 2012

Abstract

We investigate the determinants of net interest margins of Indonesian banks after the 1997/1998 financial crisis. Using data for 93 Indonesian banks over the 2001-2009 period, we estimate an econometric model using a pooled regression as well as static and dynamic panel regressions. Our results confirm that the structure of loan portfolios matters in the determination of interest margins. Operating costs, market power, risk aversion and liquidity risk have positive impacts on interest margins, while credit risk and cost to income ratio are negatively associated with margins. Our results also corroborate the loss leader hypothesis on cross-subsidization between traditional interest activities and non-interest activities. State-owned banks set higher interest margins than other banks, while margins are lower for large banks and for foreign banks.

Keywords: Bank interest margins, Financial intermediation, Small scale loans, Indonesia

JEL Classification: G21, G28, G32

Suggested Citation

Trinugroho, Irwan and Agusman, Agusman and Tarazi, Amine, Why Have Bank Interest Margins Been so High in Indonesia Since the 1997/1998 Financial Crisis? (August 8, 2012). Available at SSRN: https://ssrn.com/abstract=2319057 or http://dx.doi.org/10.2139/ssrn.2319057

Irwan Trinugroho (Contact Author)

Université de Limoges, LAPE ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

Agusman Agusman

Bank Indonesia ( email )

Jl. M.H.Thamrin No.2
Jakarta, 10350
Indonesia
62-21-3818075 (Phone)
62-21-3518629 (Fax)

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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