An Empirical Analysis of the Determinants of Interest Rate Spreads: A Case of Commercial Banks in Zimbabwe

Abstract

Zimbabwe is one nation that has for many years remained on the top list of economies with high interest rates spread. High interest rates are a signal of financial sector inefficiency. The stability of the financial sector is greatly linked to economic growth and economic stability. The study sought to determine the major determinants of interest rate spreads in Zimbabwean commercial banking sector. A panel data regression analysis using Stata 11.1 software is employed for the multicurrency period (2009-2015), for 5 commercial banks in Zimbabwe listed on the Zimbabwe Stock Exchange. Through panel tests on collected data, the study adopted the Random Effects Model. Interest rate spreads have been found to be determined by bank-specific factors, industry –specific factors and the macroeconomic factors. Specifically, bank size, credit risk, return on assets, bank capacity utilisation, market concentration and inflation are the main drivers wide interest rate spreads in the banking sector. The study concluded that, it remains the duty of bank managers, central bank regulating authorities and government policy makers to design and implement ways to narrow down interest rate spreads to match regional and world average magnitudes. Banks a tipped to implement effective credit risk management strategies, business growth strategies and earnings growth strategies, while government policy makers should control and stabilize inflation. Competitive policies in the entire banking industries are expected to yield competitive pricing of financial products.

Keywords: Interest Rate Spreads, Lending Rate, Deposit Rate, Commercial Banks, Credit Risk, Liquidity Risk, Panel Data, Macro factors, Bank specific factors, Industry specific factors, HHI, Zimbabwe

JEL Classification: C13, C23, E21, E41, E43, E44, E58, G21, O16