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Bank Efficiency, Ownership, and Market Structure: Why are Interest Spreads so High in Uganda?

39 Pages Posted: 20 Apr 2016  

Thorsten Beck

City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Heiko Hesse

International Monetary Fund (IMF)

Date Written: October 1, 2006

Abstract

Using a unique bank-level data set on the Ugandan banking system during 1999-2005, the authors explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, they do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure, and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank variation in spreads and margins. Further, the authors find tentative evidence that banks targeting the low end of the market incur higher costs and therefore higher margins.

Keywords: Banks & Banking Reform, Economic Theory & Research, Investment and Investment Climate, Financial Crisis Management & Restructuring, Financial Intermediation

Suggested Citation

Beck, Thorsten and Hesse, Heiko, Bank Efficiency, Ownership, and Market Structure: Why are Interest Spreads so High in Uganda? (October 1, 2006). World Bank Policy Research Working Paper No. 4027. Available at SSRN: https://ssrn.com/abstract=934964

Thorsten Beck

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Heiko Hesse (Contact Author)

International Monetary Fund (IMF) ( email )

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

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