What Drives Interest Rate Spreads in Pacific Island Countries? An Empirical Investigation

27 Pages Posted: 2 Jun 2015

See all articles by Fazurin Jamaludin

Fazurin Jamaludin

International Monetary Fund (IMF)

Vladimir Klyuev

International Monetary Fund (IMF)

Anuk Serechetapongse

International Monetary Fund (IMF)

Date Written: May 2015

Abstract

Growth has been sluggish in Pacific island countries (PICs). High cost of credit is likely one of the reasons. While the small scale, geographic dispersion, and vulnerability to shocks increase the cost and risk of credit in this country group, there is considerable variability in interest rate spreads both across countries and over time. This paper examines the determinants of lending rates and interest rate spreads in a panel of six PICs, extending the literature that was largely descriptive in nature or focused on a single country. Our results are in line with economic theory. We find that the size of the economy is negatively correlated with spreads, confirming the importance of scale. Inflation appears to have only marginal impact on spreads. High loan loss provisions and nonperforming loans increase the cost of credit. So does banking system concentration. Higher institutional quality is associated with lower spreads.

Keywords: Banking systems, Pacific Island Countries, Foreign banks, Interest rates, Profit margins, Cross-country analysis, banking sector, credit, lending, deposits, commercial banks, loans, inflation, markets, risk

JEL Classification: E43

Suggested Citation

Jamaludin, Fazurin and Klyuev, Vladimir and Serechetapongse, Anuk, What Drives Interest Rate Spreads in Pacific Island Countries? An Empirical Investigation (May 2015). IMF Working Paper No. 15/96. Available at SSRN: https://ssrn.com/abstract=2613306

Fazurin Jamaludin (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Vladimir Klyuev

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Anuk Serechetapongse

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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