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The Determinants of Net Interest Margin in the Turkish Banking Sector: Does Bank Ownership Matter?



This research presented an empirical investigation of the determinants of the net interest margin in Turkish Banking sector with a particular emphasis on the bank ownership structure. This study employed a unique bank-level dataset covering Turkey's commercial banking sector for the 2001-2012. Our main results are as follows. Operation diversity, credit risk and operating costs are important determinants of margin in Turkey. More efficient banks exhibit lower margin and also price stability contributes to lower margin. The effect of principal determinants such as credit risk, bank size, market concentration and inflation vary across foreign-owned, state-controlled and private banks. At the same time, the impacts of implicit interest payment, operation diversity and operating cost are homogeneous across all banks.
The Determinants of Net Interest Margin in the Turkish Banking Sector:
Does Bank Ownership Matter?
Fatih Kansoy*
This research presented an empirical investigation of the determinants of the net interest margin in Turk-
ish Banking sector with a particular emphasis on the bank ownership structure. This study employed a
unique bank-level dataset covering Turkey‘s commercial banking sector for the 2001-2012. Our main
results are as follows. Operation diversity, credit risk and operating costs are important determinants of
margin in Turkey. More efficient banks exhibit lower margin and also price stability contributes to lower
margin. The effect of principal determinants such as credit risk, bank size, market concentration and
inflation vary across foreign-owned, state-controlled and private banks. At the same time, the impacts
of implicit interest payment, operation diversity and operating cost are homogeneous across all banks.
JEL classification: C33, E40, G21.
Keywords: Bank, Turkish Banking System, Interest Rate Margin,
To cite: Kansoy, F. (2012). The Determinants of Net Interest Margin in the Turkish Banking Sector: Does
Bank Ownership Matter?. Journal of BRSA Banking and Financial Markets,6(2), 13-49.
*The University of Nottingham, School of Economics, Sir Clive Granger Building, Room: C36, NG7 2RD, Nottingham, United
Kingdom. Email: Email-2:
I. Introduction
Many studies have found that financial development and efficiency have strong relations with eco-
nomic conditions. Levine and Zervos (1998) showed that the financial dynamics play a positive role on
economic growth. Also, Calderón and Liu (2003) concluded that improvement in the financial system
brings economic growth. This is especially true for Turkey where banking sector has been improving
for ten years after the 2001 banking crisis with parallel its GDP growth rate. For instance, as far as our
calculation, from the last quarter of 2001 to the first quarter of 2012, the ratio of total banking market
assets to GDP increased by 51 percent. It means that banks started to play a dominant and increasingly
significant role in the financial system of Turkey.
In the recent credit crunch faced by the world, global financial giants announced substantial losses
and some of them went bankrupt or were nationalised. In contrast to this, the Turkish banking sector
declared considerable profits (Aysan, Dalgic, and Demirci,2010). This situation is interpreted as a suc-
cess of the Turkish Banking sector and also triggered a fundamental discussion on the efficiency of the
Turkish banking industry (Times,2010). In this case, the Net Interest Margin1(hereafter NIM) as a signif-
icant component of the efficiency and the profitability of the banking sector needs to be investigated and
understood with its major determinants in Turkey, in order to gain a clear perspective (Demirgüç-Kunt
and Huizinga,1999).
Although other studies have dealt with the competition structure, performance and profitability of
the Turkish banking sector (for example, see Aysan et al. (2010)) or some Turkish banks who have been
included in several cross-country studies (see Demirgüç-Kunt and Huizinga (1999); Aysan et al. (2010);
Kasman, Tunc, Vardar, and Okan (2010)) which examined the NIM on the Turkish banking system using
the static estimation model. The relatively little research or no special research on the determination
of NIM in Turkey has created a gap in the NIM literature. Therefore, the principal motivation of this
study is to fill this gap. This research, to the best of knowledge, will provide the first dynamic estimation
of the NIM and take the structure of bank ownership into account in particularly. Furthermore, the
previous studies used limited samples of the Turkish banking sector which are available on international
databases such as the BankScope. However, this study uses rich and specific dataset for every single
bank and also the data sample of this study is based on seasonal data covering the whole Turkish banking
sector while previous studies mostly used yearly datasets.
A. Research Questions
A.1. What are the key determinants of the Net Interest Margin in the Turkey Banking sector?
The contemporary literature suggests that the determinants of NIM are numerous and differ across
the regions, countries and even the structure of ownership. The determinants of NIM can be divided into
three parts I) bank-specific, II) industry-specific, and III) macroeconomic specific. Some studies claim
that the macroeconomic determinants have the most crucial effects on the determination of the NIM,
whereas a substantial number of studies argue that the bank-specific and industry-specific factors are
very important factors that affect the margin. Therefore, to answer or investigate this question is vital to
gain a clear perspective for the NIM in Turkey. It is important because understanding the drivers of the
NIM is valuable both from a macro and micro view (Liebeg, Schwaiger, et al.,2006). From a macro or
an economic stability perspective, it is helpful for a monetary authority to understand whether the in-
creasing or decreasing NIM is mainly attributable to the microeconomic factors or the macroeconomic
conditions. For example, if one of the crucial components of the NIM is determined by the volatility
of nominal interest rate instead of the competition structure of the banking sector, the government au-
thority ought to focus on how to provide a stable macroeconomic environment to decrease the cost of
financial intermediation services. On the contrary, if the main element of NIM is market power, the pub-
lic policy should be aimed at promoting competition in the banking sector. Regarding the micro vision,
specifying the main foundations behind the moving (widening or tightening) of the NIM might enable
investors to evaluate potential changes in the NIM in Turkey. For these reasons, this study targets to offer
a better understanding of the elements that drive the NIM and to contribute some noteworthy policy
insights regarding the macro and micro perspectives.
A.2. Are intercepts and the effects and coefficients of the determinants the same for all ownership
In the literature, the source of interest revenue and the costs vary by bank ownership structure. The
ownership structure of bank may play different a role on performance or profits of bank. Consequently,
the strategies and incentives related to the NIM might differ by the bank ownership. For instance, Drakos
(2003), Mody and Peria (2004), and Williams (2007) claimed that the foreign ownership has a negative sig-
nificant effect on the NIM, whereas,Demirgüç-Kunt and Huizinga (1999), Liebeg et al. (2006), Fungáˇcová
and Poghosyan (2011) have found a positive relationship. On the contrary, Claessens, Demirgüç-Kunt,
and Huizinga (2001) and Dabla-Norris and Floerkemeier (2007) argued that there is no significant rela-
tionship between the ownership structure and the NIM.
On the other hand, such discussions assume that the coefficient of determinants and their effects on
the interest margin are the same for all different bank structures. However, in this research, it is assumed
that the intercepts and the coefficient of the determinants may differ for all banks with different owner-
ship form. Therefore, the aim of answering above question is to make a contribution to this controversial
debate by investigating the Turkish Banking sector.
The rest of the study will be organised as follows; Section II reviews the existing literature. Section III
describes data sources and discusses the variables and provides the empirical model and methodology.
Section IV provides empirical results. Section V consists of the robustness test and its results and finally
the last section concludes.
II. Literature Review
The contemporary literature of the determinants of the NIM has been elaborated in Ho and Saunders
(1981) pioneering study. In their dealership model, they assume that a bank is a risk averse dealer in the
loan market and it acts as an intermediary between fund lenders and the borrowers. Their theoretical
model claims that the NIM is mainly contingent upon four main factors: the risk aversion degree, the
market structure, the banking transaction magnitude and the divergence of the interest rate on credits
and deposits.
Ho and Saunders (1981) set a two-step estimation approach using 100 main US banks from 1976
to 1979 for seasonal periods. In the first step of estimation, authors regress the individual banks‘ NIM
against the banks specific characteristics such as risk aversion, and the implicit interest payment. The
second step involves the estimation of pure spread that is explained by the market structure and macroe-
conomic variables. Lerner (1981) criticised the model of Ho and Saunders (1981). He argued that the
model fails to consider the potential heterogeneity across the banks. Maudos and De Guevara (2004) re-
sponded by extending the dealership model. They incorporated the operating cost into the initial model
and supplied an elaborative explanation of the relation between the riskiness and the NIM. In particular
the new model distinguishes between sector risk and loan risk in addition to separating potential factors
that affect the NIM.
The empirical studies in the literature attempting to analyse the bank interest margin vary on a large
number of countries sample (see Demirgüç-Kunt and Huizinga (1999)) to a single country examples (see
Fungacova and Poghosyan, 2011). Also some studies examine particularly developed countries (Mau-
dos and Solís,2009) and the emerging countries (Mody and Peria,2004) moreover; there are also some
regional studies like the Central Eastern European countries (Claeys and Vander Vennet,2008).
A. Studies on Developed Countries
Studies focusing on developed countries for the determinations of NIM are generally parallel with
the theoretical structure of the Ho and Saunders (1981) model.Angbazo (1997) by using the US data for
the period 1989-1993 added the credit risk and the interest risk into the model. This study indicates that
the interest margin has a negative relation to the liquidity and competition, whereas positive relation
in the case of management quality, market power and gross income volatility. Similarly, Saunders and
Schumacher (2000) apply the two step model for the US banking system and the bank data for the six Eu-
ropean countries for the 1998-95 period. Results show regulatory issues and macroeconomic conditions
have crucial effects on the NIM for the banking sectors of those countries.
Maudos and De Guevara (2004) make a very influential contribution to the NIM literature. As men-
tioned above, Maudos and De Guevara (2004) have responded to the critics of Lerner (1981) on the pio-
neering Ho and Saunders (1981)’s model by expanding the theoretical model through including operat-
ing cost as a determinant of the interest margin with their empirical study for the five European countries
banking industries in the period 1992-2000. Maudos and De Guevara (2004) claim that the banking in-
termediation is reflected by the operating cost as a function of the deposit taken and credit granted. For
this reason they conclude that the banks have to cover their operating cost by charging higher interest
margin. Except the operating cost, they also conclude that interest rate and credit risk, capital adequacy,
implicit interest payment and management efficiency have a positive relationship with the NIM.
Similar to Maudos and De Guevara (2004) and Valverde and Fernández (2007) have made a signif-
icant contribution to the original model. They improve the model by incorporating both conventional
and non-conventional operations of the bank in order to observe the impact of diversification on the
NIM by considering multi-output model for seven European countries. The evidence of their dynamic
estimation model suggests that the specialisation in non-conventional operations induces a narrowing
in margin and a widening in the market share as a result of cross-subsidisation. Finally, their results show
a negative relation between the GDP growth and interest margin.
Hawtrey and Liang (2008) carry out another study on fourteen OECD countries, the According to
the study of Hawtrey and Liang‘s (2008) the bank interest margin is negatively affected by management
quality and positively affected by the credit risk and implicit interest margin. Whereas, Williams (2007)
claims that there is a negative relation between credit risks and the NIMs in Austrian banking industry.
Some selected studies on developed countries for the NIM is provided in Table 8.
B. Studies on Developing Countries, Regions and a Large Sample of Countries
The empirical studies on the determination of the NIM in developing countries have controversial
results compared to developed countries. For this reason Brock and Rojas-Suarez (2000) argued that
the generally true methods for developed countries cannot be valid for less developed countries. For
example, covering a large sample of countries around the world Demirgüç-Kunt and Huizinga (1999)
have analysed the determinants of NIMs by employing bank level data for 80 countries for the years
1988-95 and they have found out that the effect of the banking ownership on the NIM is different for
developed countries compared to the developing ones. They claim that in developed countries, domestic
banks realise higher interest margins than foreign banks, in contrast in the developing countries foreign
banks realise higher margins than the domestic banks. Their evidence suggests that macroeconomic and
regulatory factors have substantial effects on the interest margin.
In parallel with Demirgüç-Kunt and Huizinga (1999) results, the study of Mody and Peria (2004) for
seven Latin American countries show that the foreign banks in these countries are able to exhibit lower
margins and also lower the cost down to less than the cost of domestic banks. This is also suggested by
Drakos (2003) for the Central Eastern European (CEE) Countries. In contrast to Drakos (2003); Liebeg
et al. (2006) argue that foreign banks apply higher spread than the domestic banks, even though their
work is on the CEE Countries. Claeys and Vander Vennet (2008) examine the effects of macroeconomic
environment, industry specific features and bank specific characteristics on the NIM in the CEE coun-
tries for the years 1994-2001.
Maudos and Solís (2009) improve the model with their study on the Mexican banking industry and
their results suggest that the operating costs and liquidity ratio have a positive and significant effect on
the NIM. Another country-based study is on Russia, carried out by Fungáˇcová and Poghosyan (2011) and
they provide the first evidence on the determinants of NIM in terms of the bank ownership effect. Their
findings show that the level of margin varies over domestic, public and foreign banks. Gounder and
Sharma (2012) show that NIM is positively associated with the implicit interest margin, operating cost
and the market share, whereas the management quality and liquidity ratio is negatively related. Table
9 and Table 10 provide some information for the studies on the interest margin of developing countries
and international cross-countries.
III. Empirical Approach and Data
A. Data Information
This study uses three different types of data for analysing the NIM of the Turkish Banking System.
The first one is the bank-specific data, which was obtained from the Banks Association of Turkey2. The
second one is that the industry-specific data which reflects the main features of the Turkish Banking in-
dustry. This study uses some market-specific data, such as Herfindahl Index, and it was obtained from
the Banks Association of Turkey. The last data illustrates the macroeconomic environment of Turkey at
a particular period, such as the real GDP growth and inflation. The Macroeconomic data was obtained
from the Central Bank of Republic of Turkey. To eliminate the direct impact of the 2000 and 2001 eco-
nomic and banking crises, the quarterly dataset of this study ranges from the last quarter of 2001 to the
first quarter of 2012 and includes twenty-three commercial banks.
This dataset has three major advantages when compared to the most previous studies. First, the
dataset covers almost all of the commercial banks in the sector, in contrast many previous studies have
used the Bankscope dataset, which has a selection bias since the Bankscope dataset includes only the
main players and excludes the small players. Secondly, the dataset of this study consists of quarterly data,
not annually, and this allows us to interpret changes over four quarters. Lastly, all banks in the dataset
use the same accounting and regulatory regime and the same type of balance sheet. These advantages
prevent potential distorting influence in the analyses. Table-II and Igive the data statistical summaries
and the cross correlation matrix information, respectively.
Table I Cross Correlation Matrix
RA 0.302 1
RBD 0.053 -0.068 1
OC 0.307 0.483 0.054 1
LOGTA -0.127 -0.474 0.023 -0.362 1
LQR -0.033 0.187 -0.159 0.060 -0.188 1
MNGMT -0.073 -0.069 0.075 0.263 -0.085 0.018 1
IIP 0.660 0.148 0.077 0.300 -0.116 -0.108 0.072 1
DPZTG -0.095 0.128 -0.026 0.106 -0.071 0.092 0.011 -0.077 1
DVRSTY 0.009 0.032 0.066 0.124 -0.089 0.124 -0.146 0.064 0.077 1
HHI 0.116 0.117 0.387 0.236 -0.338 0.034 0.001 0.039 0.020 0.092 1
GDP -0.140 -0.035 -0.087 -0.007 -0.016 -0.007 0.035 -0.067 0.019 0.016 0.118 1
INF 0.227 0.082 0.470 0.198 -0.263 0.078 -0.041 0.104 -0.010 0.081 0.661 -0.246 1
Table II Summary Statistics
Variable Mean Std. Dev. Min Max Observations
NIM Overall 1.488 3.496 -15.630 73.190 N = 966
Between 0.604 0.519 3.617 n = 23
Within 3.446 -14.661 74.159 T = 42
RA Overall 14.028 7.972 -3.270 91.610 N = 966
Between 4.917 8.998 25.655 n = 23
Within 6.356 -3.727 82.970 T = 42
RBD Overall 7.485 13.532 0.000 125.370 N = 966
Between 6.147 0.000 27.476 n = 23
Within 12.122 -17.081 116.299 T = 42
OC Overall 1.359 1.818 -7.440 27.390 N = 966
Between 0.769 0.614 4.371 n = 23
Within 1.655 -10.452 24.378 T = 42
LOGTA Overall 6.776 0.807 4.390 8.230 N = 966
Between 0.755 5.679 7.876 n = 23
Within 0.326 5.487 7.567 T = 42
LQR Overall 35.133 19.966 2.900 271.930 N = 966
Between 14.599 17.443 80.808 n = 23
Within 13.948 -23.481 283.895 T = 42
MNGMT Overall 60.844 97.955 -1498.740 1831.510 N = 966
Between 19.099 33.810 118.447 n = 23
Within 96.156 -1556.343 1794.468 T = 42
IIP Overall 0.471 4.196 -52.580 82.450 N = 966
Between 1.588 -4.450 5.587 n = 23
Within 3.898 -47.659 77.334 T = 42
DPZTG Overall 26.868 477.392 -99.900 14266.000 N = 966
Between 81.311 3.003 387.596 n = 23
Within 470.715 -451.038 13905.270 T = 42
DVRSTY Overall 0.381 0. 873648 -6.471 12.210 N = 966
Between 0.250 0.293 0.898 n = 23
Within 0.838 -10.298 7.205 T = 42
HHI Overall 10.882 0.643 9.940 12.230 N = 966
Between 0.000 10.882 10.882 n = 23
Within 0.643 9.940 12.230 T = 42
GDP Overall 5.092 5.865 -14.740 12.590 N = 966
Between 0.000 5.092 5.092 n = 23
Within 5.865 -14.740 12.590 T = 42
INF Overall 14.845 14.977 4.350 70.370 N = 966
Between 1.446 8.214 15.147 n = 23
Within 14.910 4.049 70.069 T = 42
B. Empirical Strategy
B.1. Static Panel Estimations
At first, this study starts with Pooled Ordinary Least Squares (POLS) estimation for static model. The
OLS estimators are assumed that they are consistent when all independent variables are not correlated
with the error term. However, the fact that this assumption can be violated in the case of that there
are unobserved bank specific impacts or independent variables might be correlated with the error term
for example, endogeneity problem. The empirical model of this study for conventional cross-section
regression is as follows:
where NIMi,tit is the NIM of bank iat time t,ξis a constant term, µiis an independently distributed
error term with E[εi,t]=0 also µiis an unobserved bank specific effects which is not correlated the error
term. Xrepresents the set of independent variables as follow
βkP I Mk,i,t+
λmM M Em,t(2)
βkis the Kcoefficients of the pure interest rate margin (PIM), Ψlis the Lcoefficients of the bank spe-
cific (BS) determinants and λmis the Mcoefficients of the market specific and macroeconomic specific
determinants that are constant over all banks in a given time.
When performing the POLS regression, this study does not take into unobserved bank specific effects
account for the model-1. Hence, heterogeneity of the bank specific might be appearing of the estimated
parameters. For these reasons, this study estimates the model incorporates unobserved bank specific
effects by Fixed and Random Effect methods. Combining the bank specific effects has many advantages.
For instance, it permits accounting for specific effects. After that, in order to decide between POLS and
Random Effect as an estimation method the Breusch and Pagan‘s LM test is used.
H0: Irrelevance of unobserved bank specific effects.
HA: Relevance of unobserved bank specific effects.
Rejecting the null hypothesis implies that the POLS is not proper method for estimation and vice
versa. Also, to test the misspecification between the Random Effect and Fixed Effect methods the Haus-
man test is used. All these tests can be seen at Table-VI and VII
B.2. Dynamic Panel Estimation
The static models are not able to investigate the potential dynamism. To capture the tendency of
the NIM and to be persistent over time this study considers that the current values of the NIM might
be determined by their previous values (Valverde and Fernández,2007). This study therefore estimates
the following dynamic model, with the lagged dependent variable among the regressors. In dynamic
framework, this study‘s model can be re-written in the following form
for i=1,.. ., Nand t=2,.. .,Twhere it has the standard error component structure;
for i=1,.. ., Nand t=2,.. .,T
In order to eliminate bank specific effect the first difference is taken;
The lagged dependent variable NIMi,t1NIMi,t2and the error term εi,tεi,t1are correlated
with each other which indicates that the explanatory variables are likely endogenous. The economet-
ric presumptions indicate that the error term is not serially correlated and the explanatory variables are
weakly exogenous. Thus, the moment conditions based upon difference estimator is employed by dy-
namic GMM estimator for Equation-3
E³NIMi,tk³εi,tεi,t1´´=0f or t =3, ...T,k2 (6)
E³Xi,tk³εi,tεi,t1´´=0f or t =3,...T,k2 (7)
This can be written the matrix presentation as;
yi,1 0 0 ··· 0··· 0
0yi,1 yi,2 ··· 0··· 0
000··· yi,1 ··· yi,T2
Where Kis the instruments matrix corresponding to the endogenous variables and yi,tsdenomi-
nates NIMi,tkfor Equation-6.
Nevertheless, the first estimator is not free from bias and imprecision. Hence, in order to alleviate the
possible bias and imprecision, as Blundell and Bond (1998) mentioned that a new estimator that unites
a system in the difference estimator can be used if the regressors have limited time period that is known
as â˘
AIJthe Blundell and Bond system GMMâ˘
I. The econometric presumption is that the difference in
the explanatory variables and the bank specific effect are uncorrelated. Thus, the stationary features are;
For Equation-3;
E£NIMi,t+pµi¤=E£NIMi,t+qµi¤and E£Xi,t+pµi¤=E£Xi,t+qµi¤p and q (8)
The additional moment conditions;
E£NIMi,tk(µi+εi,t)¤=0f or k =1 (9)
E£Xi,tk(µi+εi,t)¤=0f or k =1 (10)
Now, the GMM methods can be used for model in order to estimate the consistent and efficient
parameter by putting account the moment condition for Equation (6), (7), (9) and (10) for the determi-
nation of the NIM model. The system GMM employs the lagged dependent variable in the levels and in
differences; at the same time other lagged regressors can be suffered from endogeneity problem (Diet-
rich and Wanzenried,2011).
Finally, to control the health of estimation method this study performs some tests. In order to reject
the null hypothesis of joint insignificance coefficients this study uses the Wald test. For the validity of the
instrument in the system GMM this study applied two specification tests. First is the Sargan test which is
used to for the emphasising over identifying restrictions is valid. Second is the Arellano-Bond test which
is to investigate the hypothesis that residual term is serially uncorrelated.
C. Explanatory Variables
C.1. Pure Interest Margin Variables
Risk Aversion: The ratio of equity to the total assets as a proxy for the bank risk aversion or bank-
capitalisation ratio. For instance, high-capitalised banks are generally thought to be safer and less risky
than lower capitalised banks with higher interest rates for credits. Therefore, it is expected that the risk
aversion has a positive impact on the NIM. On the other hand, (Brock and Suarez,2000) argued that there
is a negative correlation between the NIM and the risk aversion. Because the less capitalised banks have
more incentives to take more risks, the consequence is higher margin in order to obtain higher return.
As a result the impact of risk aversion is not clear
Credit Risk: This study calculates the credit risk or the ratio of bad debt using the ratio of non-
performing loan to the total loan. It is believed that if this ratio rises due to the health of the bank assets,
it will deteriorate the banks, and will generally raise their interest rate to compensate this cost. A positive
relationship is expected between the NIM and ratio of bad debt.
Operating Cost: Operating costs are simply defined as the ratio of operating expenses to the total
bank assets. Demirgüç-Kunt and Huizinga (1999) claimed that banks with high operating cost are willing
to pass this cost to their customers. Therefore, it is clear that banks experiencing high operating cost are
predicted to have high interest margins; hence, operating cost has a positive effect on the NIM.
Bank Size: Bank size is captured by the logarithm of bank‘s total assets. Ex-ante, the relationship
between the bank NIM and bank size is ambiguous. The general perception is that the governments are
not willing to permit large banks to fail, -too big to fail-for this reason big banks might take a position
that has high-risk but high returns. Hence, the sign of the relationship between bank size and the NIM
is predicted to be positive. On the other hand, some studies (for example Demirgüç-Kunt and Huizinga
(1999); Laeven and Levine (2007) argue that big banks generally apply lower interest margins relatively
to the smaller ones because of the scale efficiencies.
C.2. Bank Specific Variables
Liquidity Ratio: Liquidity ratio is proxied in relation to the liquid assets to total assets. The charac-
teristics of the liquid assets tend to yield lower return (Aysan et al.,2010). For this reason, the banks have
high amount of liquid assets that are more likely to have less interest income. Thus, the predicted sign of
liquid assets is negative.
Efficiency-Management Quality: Management quality is defined as the operating expense to total
revenues. This relation is also used to measure the impact of management quality on the bank profitabil-
ity. The operating expense is accepted as a necessary cost to create unit gross revenue. Therefore, the
banks with high management efficiency are able to create and invest in high profitable assets. Hence, an
increasing ratio means decreasing management efficiency, thus, a lower NIM, and as a natural result, the
relationship between management efficiency and banks NIM is negative.
Implicit interest payment: Implicit interest payment is expressed as the difference between the non-
interest cost and other operating revenue over total assets. The sign of the implicit interest payment is
not clear. While Maudos and De Guevara (2004); and Maudos and Solís (2009) have found a positive
impact,Liebeg et al. (2006) and Gounder and Sharma (2012) have found a negative relationship.
Deposit Growth Rate: The deposit growth rate is measured by the quarterly growth of bank deposits.
It is expected that the banks with high growth rate of deposit are able to decrease its NIM because of
the economics of scale. Deposits growth rate depends on many different factors such as the number of
branches and management quality. A negative relationship associated with deposit growth rate and the
NIM is expected.
Operation Diversity: The ratio of non-interest revenue to total operating income captures the op-
erating diversity. This proportion suggests the information of non-traditional banking activities. If this
ratio is high for a bank, this means that that bank focuses the non-conventional banks operation such
as fee based activities. This is important especially during the crises and uncertainty. This variable is
used by many other studies. For example, Lin, Chung, Hsieh, and Wu (2012) for Asian banks, Valverde
and Fernández (2007) for European banks, Liebeg et al. (2006) for Austrian banks. These operations are
known to be less risky than interest-based operations, thus the interest return operations are of high
risk but have high returns, vice versa. For instance, Demirgüç-Kunt and Huizinga (1999) showed that
non-interest assets have less returns than the interest based assets. In order to diversify the operation,
banks need a wide network and high-qualified employees and also bear some other expenses. Thus, the
expectation is that operation diversity has a negative relationship with the NIM.
Table III Definition of Variables and Their Expected Effect on the Net Interest Margin
Variables Notation Definition Expected Sign
Net Interest Margin % NIM Net interest income divided by total assets
Risk Aversion % RA Equity over total assets ?
Credit Risk % RBD Non-performing loan over total loan +
Operating Cost % OC Operation cost over total assets ?
Bank Size LOGTA Logarithm of total assets ?
Liquidity Ratio % LQR Ratio of liquid assets to total assets -
Management Quality % MNGMT Total expenses over total generated revenues -
Implicit Interest Payment % IIP Net non-interest income over total assets +
Deposits Growth % DPZTG Quarterly growth of deposits -
Operation Diversity % DVRSTY Non-interest income over operating income -
Herfindahl Index % HHI Herfindahl index for assets +
Real GDP Growth % GDP Quarterly real GDP growth ?
Inflation % INF CPI growth rate +
C.3. Macroeconomic and Market Variables
Competitive Structure: To capture the competitive structure of the banking industry, the Herfind-
SHirschman Index (HHI) is used. The HHI is defined as the sum of the squares of the market share
of the individual bank assets in the total banking assets in a given time (in this case: quarterly). It is gen-
erally accepted that the high market concentration reflects less competition and enables banks to have
monopolistic power over the interest rates. Therefore, most studies expect the sign of the estimated co-
efficient of the HHI to have a positive sign. On contrary, some studies (for example, see Barajas, Steiner,
and Salazar (2000) argue that the NIM and market concentration have a negative relationship. For ex-
ample, their evidence shows that a higher bank concentration could be the consequence of a strong
competition in the banking market, which would offer an opposite relationship. As a result, the overall
impact of industry concentration on the NIM is not clear and still waits to be answered empirically.
The Real GDP Growth: To measure the effect of the business cycle on the NIM, this study controls
for the real GDP growth. The impact of the GDP growth on the NIM varies over countries; therefore the
expected sign is not clear. While Khawaja and Din (2007) have found a negative relationship between
the GDP growth and the NIM in Pakistan, Liebeg et al. (2006) have suggested a positive relationship
for Austrian banking sector. In parallel with these findings, Costa da Silva, Oreiro, and De Paula (2007)
suggest that the relationship is ex-ante, ambiguous.
Inflation: As a macroeconomic uncertainty indicator, this study uses inflation variable to measure
the impact of macroeconomic uncertainty on the NIM. Due to difficulty of anticipating the inflation
rate for the next period, banks generally prefer to hold a safe position such as investing in government
bonds instead of lending loan. Because an unpredicted inflation rate may raise costs, there is a reason
for imperfect interest rate adjustment. Therefore, in a high volatile economic environment, banks might
charge higher interest margin for lending to cover the potential risk and this study expects a positive
relationship between inflation and the NIM.
IV. Empirical Results
A. Overall Results
This section has been divided into two parts. The first part provides the findings of the whole sample
and the second part shows the results of the separate estimations by bank ownership structure. To in-
vestigate the hypotheses, this study estimates four different models with using proper econometric tests
to decide appropriate estimation technique. Table-IV summaries the regression results employing dif-
ferent techniques. The column (1) shows the Pooled OLS (POLS) result, since, the POLS does not allow
to accounting unobserved bank specific effect, the within Fixed Effect (FE) and GLS-Random Effect(RE)
methods are executed. The column (2) and (3) provide these results respectively. The results of RE esti-
mation are consistent with the results of the POLS. To investigate the relevance of bank specific effects,
the LM test provides that this study rejects the null hypothesis, which is the POLS is a proper method to
provide the relationship between the NIM and its determinants. This means that the FE or the RE should
be used instead of the POLS in cases of static estimation methods. To decide the Fixed or Random Effect,
the Hausman test technique is used and the result which is in favour of FE Model. All these tests results
are summarise in Table-IV.
Nevertheless, such static models do not allow us to investigate the potential dynamism, thus, per-
forming the dynamic GMM estimator in this regard seems a best alternative, and the column (4) shows
the results of the GMM estimation. This hypothesis considers that the lagged value of the NIMs might
have a significant effect on the current value of the NIM. As it can be seen from the first and the second
rows‘ result in column (4) on the Table-III, the lagged dependent variables have a significant effect on the
current values of the NIM. Additionally, we also provide the Sargan test for over-identifying restrictions
and the results prove that our specification is well modelled. Furthermore, the results of the Arellano-
Bond test for checking serial correlation support to our model. The following results of variables are
based on the baseline specification which uses the GMM estimation method.
Risk Aversion: On the contrary of a number of studies (see Claeys and Vander Vennet (2008); Mau-
dos and Solís (2009); Flamini, Schumacher, and McDonald (2009); Fungáˇcová and Poghosyan (2011)) the
results of this study surprisingly have shown that the correlation between risk version and the NIM is in-
significant even its coefficient is positive. Higher risk aversion ratio implies that banks set higher margin
due to positive relationship.
Credit Risk: Surprisingly, the relationship between credit risk and the NIM is not positive as pre-
dicted. However, it has a significant impact on the NIM. A positive and significant relationship implies
that the NIM decreases as the quality of credit falls and the banks with large credit risk might raise margin
in order to solve such problems. The result is inconsistent with Gounder and Sharma (2012)
Operating Cost: The coefficient of operating costs is positive and statistically significant. This means
that the banks with higher operating expenses have higher NIM to compensate their operation expense.
Table IV Regressions Results
1 2 3 4
L.NIM - - - 0.228***
L2.NIM - - - -0.0122***
RA 0.0899*** 0.0983*** 0.0899*** 0.0115
(0.0127) (0.0156) (0.0127) (0.00777)
RBD -0.0164** -0.0218*** -0.0164** -0.0343***
(0.0069) (0.00775) (0.0069) (0.00524)
OC 0.134** 0.153** 0.134** 0.0817***
(0.0561) (0.06) (0.0561) (0.0107)
LOGTA 0.413*** 0.834 0.413*** 0.00962
(0.12) (0.509) (0.12) (0.147)
LQR -5.98E-05 -0.00985* -5.98E-05 -0.002
(0.00417) (0.00563) (0.00417) (0.00176)
MNGMT -0.00381*** -0.00344*** -0.00381*** -0.00620***
(0.000885) (0.000898) (0.000885) (0.00023)
IIP 0.508*** 0.541*** 0.508*** 0.369***
(0.0198) (0.0209) (0.0198) (0.0138)
DPZTG -0.000503*** -0.000536*** -0.000503*** -0.000344***
(0.000166) (0.000165) (0.000166) (1.71E-05)
DVRSTY -0.228** -0.304*** -0.228** -0.379***
(0.0933) (0.0972) (0.0933) (0.0489)
HHI 0.0528 0.181 0.0528 0.221
(0.182) (0.255) (0.182) (0.151)
GDP -0.0294** -0.0262* -0.0294** -0.00215
(0.0148) (0.0147) (0.0148) (0.00205)
INF 0.0394*** 0.0445*** 0.0394*** 0.0295***
(0.00819) (0.00842) (0.00819) (0.00599)
CONSTANT -3.546 -7.657 -3.546 -1.354
(2.25) (5.83) (2.25) (2.261)
OBSERVATIONS 966 966 966 920
R-squared 0.535 0.538 0.535 0.555
Sargan test (P value) - - - 0.6743
A-Bond Test AR(1) - - - 0.0226
A-Bond Test AR(2) - - - 0.1157
Number of Banks 23 23 23 23
Hence, high operating costs are mostly passed to customers to keep the banks‘ profit unaffected. The
result of the operating cost is in line with Maudos and Solís (2009)
Bank Size: The bank size does not seem to be a significant determinant of banks‘ NIM and have a
negative sign. This study also used the banks‘ size variable for the logarithm of total loan, instead of the
logarithm of total assets, but again failed to find any significant relationship between the bank size and
NIM. Even the coefficient of the bank size is insignificant, the sign is negative and it means that big banks
are assumed to set lower interest margin. This result is, again, inconsistent with many studies focusing
on developing countries such as Tan (2012).
Liquidity Ratio: Results show that there is a negative relationship between liquidity ratio and the
NIM. However, the magnitude of the impact is insignificant. This finding is in line with Hawtrey and
Liang (2008) and Maudos and Solís (2009).
Management Quality: This study‘s result suggests that the management efficiency a negative and
significant effect on the margin. This result implies that the banks with less management quality set
higher interest margin. This relation can be interpreted as a beneficial condition for the bank‘s client that
higher management quality encourages banks to exhibit higher deposit rates and lower loan rates. This
study‘s result is consistent with Liebeg et al. (2006), Hawtrey and Liang (2008), Claeys and Vander Vennet
(2008)Horvath et al. (2009).
Implicit Interest Payment: Result has suggested that there is a statistically significant and positive
relationship between the interest margin and the implicit interest payment. This relation implies that
banks in Turkey might try to recover the implicit interest payment via margin setting (Gounder and
Sharma,2012). Hence, the banks that set their services more implicitly through less compensation of
liabilities exhibit a higher margin (Maudos and Solís,2009). This finding is in line with Saunders and
Schumacher (2000),
Deposits Growth: A significant and negatively relationship between the deposit growth and the NIM
has been found. It means that the banks with the ability of collecting deposits of high rate exhibit lower
interest margin.
Operation Diversity: The result suggests that the operation diversity and the NIM have a significant
and a negative relationship. The result suggest that the banks engaging mostly in interest related op-
erations, in other words the ones who take more risks and who are less diverse exhibit greater interest
margins, vice versa. As a result, if a bank takes high risks, it gains more returns than a bank that takes less
Competitive Structure (Herfindahl Hirschman Index): The coefficient of the Herfindahl-Hirchman
Index is positive but insignificant. Hence, this result indicates that, ceteris paribus, the banks with high
market do not exploit their market power on determining the interest margin in Turkey. This result is
consistent with Flamini et al. (2009), and Fungáˇcová and Poghosyan (2011). The Real GDP Growth: This
study, surprisingly, has not found any significant correlation between the real economic growth and the
NIM.. Although the coefficient of the GDP is insignificant, its sign is negative which means that economic
growth might keep interest margin low. This study‘s result is in line with Claessens et al. (2001).
Inflation: As expected the coefficient of inflation is positive and it affects the NIM significantly, which
means that banks estimate the future movement in inflation accurately and hastily enough to adjust rates
and interest margin (Flamini et al.,2009). This result can be explained with the mathematical expression.
Assuming that Ò ˇ
RD and Ò ˇ
RL are the real interest rate on deposits and loan, respectively, as that the fisher
equation holds, bank interest margin can be expressed in nominal value as:
(1+ΓL)(1 +π)(1 +ΓD)(1+π) (11)
This after manipulation gives:
(ΓLΓD)(1+π) (12)
Where, Ï˘
A indicates the inflation rate. Therefore, the impacts of inflation on the nominal interest
rates, deposits and loans do not cancel out for the reason of the cross product term, indicating a pos-
itive impact of inflation on the NIM (Flamini et al.,2009). Hence, our finding implies that banks ad-
just a higher interest margin in a higher inflation condition, vice versa. Also our finding is consistent
Demirgüç-Kunt and Huizinga (1999) and Maudos and De Guevara (2004).
B. Ownership Results
The possible effects of ownership on the NIM are investigated in this section. To obtain a clear and
robust result, this study has subdivided sample into three parts according to ownership, foreign, state
and private banks respectively, to analyse variations on the effects of the NIM determinants across own-
ership structure. Also this can be seen on Chow Test results, which are provided by Table-10, Table-11
and Table-12 on the appendix. According to Chow test results the coefficients do not have the same
affect for the three ownership groups. For example, for foreign banks the rejection of the hypothesis (p-
value <0.05) means that the foreign banks DO NOT share the same the coefficient for the corresponding
Table-Vsummarises the findings for ten foreign banks, three state banks and sixteen private banks
by comparing the main estimated results, which is in the column (4).
At the first glance, the results of private-owned banks are very similar to the main sample results
in terms of both coefficients‘ signs and their effects on the NIM. All coefficients‘ of private banks and
main sample sign are the same except the sign of risk aversion. This result verifies our hypothesis that
the structure of the Turkish banking system is largely controlled by domestic private banks. Another
common result is that the coefficients of the operating cost, management quality implicit interest pay-
ment and operation diversity variables and their significant effects on the NIM are consistent across all
ownership groups. This result implies that all banks react similarly to changes in management quality,
implicit interest payment ratio, operating cost and operation diversity when determining the NIM. Al-
though the management quality has a significant effect on the NIM, its economic impacts are very small
for all banks.
Regarding the foreign ownership, the results have showed that the foreign banks are not similar to
state and private banks in two aspects. The first distinctive feature of foreign banks is that the banks
Table V Estimation Results by Bank Ownership
1 2 3 4
L.NIM 0.256 0.200*** 0.115*** 0.228***
(0.176) (0.0521) (0.0429) (0.0258)
L2.NIM -0.0294** 0.243** 0.0461 -0.0122***
(0.0138) (0.124 ) (0.0468) (0.00223)
RA 0.0264 -0.00692 -0.0125 0.0115
(0.0246 ) (0.0234) (0.0166) (0.00777)
RBD -0.089 0.0103*** -0.0313*** -0.0343***
(0.125) (0.00382) (0.00549) (0.00524)
OC 0.0213 0.182 0.0381 0.0817***
(0.115) (0.173) (0.25) (0.0107)
LOGTA 0.417** -0.17 -0.094 0.00962
(0.175 ) (0.193) (-0.175) (0.147)
LQR -0.00827** 0.00276*** -0.00656*** -0.002
(0.004) (0.000941) (0.00138 ) (0.00176)
MNGMT -0.00617*** -0.00570** -0.00780*** -0.00620***
(0.00157) (0.00241) (0.00235) (0.00023 )
IIP 0.376*** 0.0308 0.425*** 0.369***
(0.0555) (0.104 ) (0.0623) (0.0138)
DPZTG -0.000389*** 0.0027 -0.000549 -0.000344***
(0.000146) (0.00244) (0.00268) (1.71E-05)
DVRSTY -0.199** -1.125*** -0.593*** -0.379***
(0.0998 ) (0.216 ) (0.181 ) (0.0489)
HHI -0.0221 -0.0568*** 0.0692* 0.221
(0.446) (0.0135) (0.0412) (0.151)
GDP 0.0168 -0.00392 -0.00844*** -0.00215
(0.0232) (0.00254) (0.0027) (0.00205)
INF 0.0847** -0.00137 0.00672 0.0295***
(0.0418) (0.00711) (0.00755) (0.00599)
CONSTANT -1.708 2.878* 1.939 -1.354
(4.475) (1.717) (1.625) (2.261)
Observations 288 120 498 920
Number of Banks 10 3 16 23
Sargan test (P value) 0.3212 0.0278 0.4563 0.6743
A-Bond Test AR(1) 0.1284 0.0872 0.0062 0.0226
A-Bond Test AR(2) 0.2492 0.1783 0.2634 0.1157
size positively and significantly affects only for the NIM of foreign banks. The positive and significant
coefficient for the bank size implies that the big foreign banks set higher margins in the Turkish banking
system. Second, the risk aversion (or capitalisation ratio) has a positive effect on only for the NIM of
foreign banks. This indicates that foreign banks with higher capitalisation ratio tend to set higher NIM.
Considering the private domestic banks, this study has found an interesting result for private banks.
Solely, the NIM of private banks is positively affected by alteration in market structure. The positive
coefficient and significant effect for the market structure indicate that the private domestic banks exploit
their special position in the industry by setting higher NIMs.
In terms of state banks, this study has also found some important results. One of them is that the liq-
uidity ratio is a positive determinant of NIM only for state banks. In contrast to this study‘s expectation,
the effect of liquidity risk on NIM is positive for foreign banks. Another important result is that the effect
of the rate of bad debt or credit risk. Credit risk has a negative impact on the NIM of foreign and private
banks and a positive effect on for only state bank. The negative sign indicates a fierce competition on
gaining the market share and thus, the results have showed that foreign and private banks are more will-
ing to accept higher ratio of bad debt without increasing their interest margins for the sake of obtaining
more market share in the sector.
Consequently, the results of the second estimation have showed that considerably variations exist
in terms of the effect of the NIM factors across the ownership groups. Thus, it is crucial to take into the
ownership structure account while investigating the effect of the interest margin determinants in Turkey.
Otherwise, a possible disregarding may cause inaccurate conclusions.
V. Robustness Checks
This section analyses the robustness and sensitivity of our findings using six different robustness
checks. A set of robustness tests is reported in Table-VIII. Firstly, this study dropped three banks from the
main sample and re-estimated by employing the same variables and the same techniques. These banks
are from different bank-ownership groups. Secondly, we dropped the whole state-owned banks from
the sample and re-estimated the model same as the previous methods. Thirdly; we have re-estimated
the model for only domestic private and state banks by excluding foreign banks from the whole sample.
Fourthly, we employ an alternative measure of bank size. In the foundation model, logarithm of total
assets was considered as the variable of bank size. However, this time, the bank size is measured by
market share as Liebeg et al. (2006) used in their paper as a determinant of the NIM. Later, this study
added a bank-specific variable which is the credit size as a determinant of the NIM (see, Aysan et al.
(2010)). Lastly, we added a macro-specific determinant of the NIM, which is the interbank interest rate.
Using different sample size and types this study has re-estimated the model with the same explana-
tory variables for column (1), (2) and (3). As a result, the sign of coefficients of the explanatory variables,
except for the RA, LOGT and HHI (in only one case) are remarkably consistent over different sample size.
Also their significances are very similar. Therefore, these three different samples specifications support
that the results obtained for the baseline model are valid.
In addition, by employing an alternative bank size variable we re-estimated the model by using the
same techniques and such results are reported in column (4). The last robustness check‘s results are also
consistent with the main results.
Finally, in the fifth and sixth robustness checks by including a bank-specific and a macro specific
variable, respectively, into the model is also in favour of the validity of the results of this study. The
results in the columns (5) and (6) are considerably parallel to each other such as all coefficients‘ sign
are the same and their significant effects have too small variation with no exception. Consequently,
all robustness tests using different variables and different sample size support the baseline estimation
results. The coefficient sign of the explanatory variables and their magnitude on the NIM, and the main
results also are in line with each other.
VI. Conclusion
This research has analysed how the pure-specific and bank-specific characteristics, and also macro
and market-specific factors affect the NIM for almost all of the commercial banks in Turkey over the
period from the last quarter of 2001 to the first quarter of 2012 with a particular emphasis on the role of
the bank ownership by employing micro and macro level data.
Findings of this study clearly indicate that the NIM of a bank is mainly determined by the bank-
specific characteristics such as management quality, operating cost, ratio of bad debt (credit risk), im-
plicit interest payment, bank‘s deposit growth rate and operation diversity, and also inflation as a macro-
specific factor. Regarding management efficiency, this study finds that efficient banks exhibit lower in-
terest margin and charge lower fees in favour of costumers. This result supports the hypothesis that
management quality can improve the financial intermediation system. Also, findings of this study sug-
gest that implicit interest payment causes a higher interest margin since this determinant represents an
extra cost for the banks. Furthermore, our research has found that ratio of bad debt (or credit risk) has
a significant and negative impact on the bank margin. Thus, the banks with high credit risk level exhibit
lower margin. Another important point is that high operating cost raises the interest margin since the
banks with high cost may pass these expenses on to their clients by charging higher rates of interest on
loan and providing lower rates for deposits.
Considering the external drivers related to the macroeconomic environment variables such as the
real economic growth and the price stability on the determination of the NIM, we have found a strong
and positive relationship between inflation and the NIM. It can be interpreted that high inflation rate
contributes to a higher margin, thus; it has a deterioration impact on the financial intermediation sys-
tem. In contrast, this study failed to find any significant relation between the GDP growth and the NIM.
The ownership-related findings have supported the hypothesis that the bank ownership has a strong
impact on the determination of the NIM. Thus, bank ownership has a crucial role on the determination
of the NIM and should not be disregarded.
Overall, the results of this study have showed that the NIM is a crucial element in order to main-
tain financial stability of Turkey. Hence, this study has some policy recommendations for both bank
managers and the government authorities. On the side of bank managers, they should upgrade their
management quality and decrease the operating cost, since both are significant determinant of the NIM.
Also they should investigate on the new technologies such as enhancing the ATM network and encour-
age their customers to use online banking for the sake of reducing implicit interest payment, which is
another major determinant of the NIM. On the side of government authorities, the price stability is one
of the main determinants of the NIM because the high inflation decreases loan expansion by causing
higher interest margin. Thus, monetary policy should target to control inflation very strictly by keeping
a reasonable rate, in order to foster the strong financial intermediation system in Turkey.
Appendix A. Appendix
Table VI Breusch and Pagan LM Test
Breusch and Pagan Lagrangian multiplier test for random effects
nim[bank,t] = Xb + u[bank] + e[bank,t]
Estimated results:
Var sd =pV ar
nim 12.22123 3.495887
e 5.688468 2.385051
u 0 0
Test: Var(u) =0
Prob >χ2=1.0000
Table VII Hausman Test
—- Coefficients —-
(b) (B) (b-B) p(d i a g (VbVB)
FE RE Difference S.E.
RA 0.098 0.090 0.008 0.009
RBD -0.022 -0.016 -0.005 0.004
OC 0.153 0.134 0.019 0.021
LOGTA 0.834 0.413 0.422 0.495
LQR -0.010 0.000 -0.010 0.004
MNGMT -0.003 -0.004 0.000 0.000
IIP 0.541 0.508 0.034 0.007
DPZTG -0.001 -0.001 0.000 .
DVRSTY 0.304 0.228 0.076 0.027
HHI 0.181 0.053 0.128 0.178
GDP -0.026 -0.029 0.003 .
INF 0.045 0.039 0.005 0.002
b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic
χ2(11) =(bB)[(VbVB)(1)](bB)
Prob >χ2=0.0000
(VbVBis not positive definite)
Table VIII Robustness Tests
1 2 3 4 5 6
L.NIM 0.138*** 0.216** 0.118*** 0.207*** 0.209*** 0.209***
(0.034) (0.0838) (0.0409) (0.0675) (0.0684) (0.069)
L2.NIM 0.033 -0.014 0.0361 -0.0172 -0.0162 -0.0158
(0.04) (0.0108) (0.0422) (0.0128 ) (0.0126) (0.0134)
RA -0.00245 0.0137 0.000158 0.0106 0.0119 0.0125
(0.0111) (0.0144) (0.0141) (0.0139) (0.0136) (0.0139)
RBD -0.0227*** -0.0559 -0.0274** -0.0424 -0.0422 -0.042
(0.00814) (0.0399) (0.011 ) (0.0288) (0.029) (0.0281)
OC 0.109 0.0905 0.0492 0.111 0.106 0.105
(0.175) (0.0738) (0.231) (0.073) (0.0728) (0.0735)
LOGTA -0.181* 0.0731 -0.162 —— 0.0109 0.0263
(0.108) (0.178) (0.144) —— (0.142) (0.201)
LQR -0.00436** -0.00313 -0.00511*** -0.0035 -0.00323 -0.00318
(0.00185) (0.00254) (0.00132) (0.00232) (0.0029) (0.00259)
MNGMT -0.00846*** -0.00566*** -0.00843*** -0.00590*** -0.00590*** -0.00592***
(0.00206) (0.00161) (0.00243) (0.00168) (0.00169) (0.00161)
IIP 0.393*** 0.377*** 0.405*** 0.377*** 0.377*** 0.377***
(0.0494) (0.0459) (0.0574) (0.0433) (0.0435) (0.044)
DPZTG -0.000154 -0.000326*** 0.000786 -0.000328*** -0.000323*** -0.000322***
(0.000815) (7.15E-05) (0.00232) (7.20E-05) (6.72E-05) (6.28E-05)
DVRSTY -0.627*** -0.355*** -0.632*** -0.368** -0.363** -0.364**
(0.162) (0.138) (0.19) (0.144) (0.148) (0.143)
HHI 0.0712 -0.0416 0.0544 -0.0525 -0.0572 -0.0585
(0.0468) (0.213) (0.0433) (0.213) (0.193) (0.168)
GDP -0.00621*** -0.000954 -0.00596** -0.00141 -0.00093 -0.000753
(0.00206) (0.00776) (0.00265) (0.00681) (0.00687) (0.0076)
INF 0.00695 0.0336 0.00888 0.0324 0.0325 0.0304
(0.00582) (0.0212) (0.00693) (0.0207) (0.0216) (0.0198)
MS —— —— —— -0.00789 —— ——
CRDT —— —— —— —— 0.0161 ——
IIR —— —— —— —— —— 0.00189
Constant 2.288** 1.041 2.402* 1.744 1.647 1.543
(1.112) (2.18) (1.37) (2.248) (2.119) (2.093)
Observations 800 800 618 920 920 920
Number of bank 20 20 19 23 23 23
Table IX Selected Literatures for the NIM- Developed Countries
Authors Angbazo
Fernandez de Guevara
Carbo Valverde
Rodriguez Fernandez
Year 1997 2000 2004 2006 2007 2007
Risk Aversion + + + + + +
Credit Risk + N/A + - + -
Operating Cost NA N/A + + + +
Bank Size NA N/A - - NA x
Liquidity Ratio - + + NA NA x
Management Quality - N/A - - NA -
Implicit Interest Payment + N/A + - NA +
Deposits Growth NA N/A NA NA NA NA
Operation Diversity NA N/A NA NA NA NA
Market Concentration + + + + + +
Real GDP Growth NA N/A NA + - NA
Inflation NA N/A NA NA NA NA
Ownership NA N/A NA NA NA Foreign(-)
Sample USA
Germany, Spain,
France, UK, USA
Italy, Switzerland,
France, Germany,
Italy, Spain, UK Austria
Germany, Spain,
France, the Netherlands,
Italy, UK, Sweden
Estimation Methods GLS Cross-sectional
Fixed Effect
OLS Dynamic GMM Dynamic GMM POLS
Table X Selected Literatures for the NIM- Developing Countries
Authors Drakos
Martinez Peria
Vander Vennet
& Liebeg
Year 2003 2004 2008 2008 2009 2009 2011 2012 2012
Risk Aversion + x + + + - + + +
Credit Risk + x NA + - + - + NA
Operating Cost NA NA NA + + + + + +
Bank Size NA NA - x + - - NA -
Liquidity Ratio - + NA NA + NA - - NA
Management Quality NA + - NA - - NA - NA
Implicit Interest Payment NA NA NA + + NA NA + NA
Deposits Growth NA NA NA + NA NA NA NA NA
Operation Diversity NA NA NA NA NA NA NA NA NA
Market Concentration NA + + + + x - + +
Real GDP Growth NA x + + NA x NA NA -
Inflation NA x + NA NA + NA NA +
Ownership Foreign (-) Foreign (-) NA Foreign(+) State(x) NA NA + NA Foreign(+)
Sample CEE Countries Latin America CEE Countries CEE Countries Mexico Czech Russia Fiji Philippines
Table XI Selected Literatures for the NIM- Cross-Country Countries
Kasman et al.
Year 1999 2008 2010
Journal WB Econ Review NAJEF Economic Modelling
Risk Aversion + + +
Credit Risk + + +
Operating Cost + + +
Bank Size NA - -
Liquidity Ratio - N/A N/A
Management Quality NA - -
Implicit Interest Payment NA + +
Deposits Growth NA N/A N/A
Operation Diversity NA N/A N/A
Market Concentration x + +
Real GDP Growth + N/A -
Inflation + N/A +
Ownership Foreign (+) N/A N/A
Sample 80 Countries OECD Countries EU Member &
Candidates Countries
Estimation Methods Pooled WLS FE GLS Pooled OLS
Angbazo, Lazarus, 1997, Commercial bank net interest margins, default risk, interest-rate risk, and off-
balance sheet banking, Journal of Banking & Finance 21, 55–87. 4
Aysan, Ahmet, Cagri Husnu Dalgic, and Murat Demirci, 2010, Macroeconomic, sector specific and bank
specific determinants of net interest rate margin: What matters more for an emerging market econ-
omy?, Technical report, EcoMod. 2,11,18
Barajas, Adolfo, Roberto Steiner, and Natalia Salazar, 2000, The impact of liberalization and foreign in-
vestment in colombia’s financial sector, Journal of development economics 63, 157–196. 12
Blundell, Richard, and Stephen Bond, 1998, Initial conditions and moment restrictions in dynamic panel
data models, Journal of econometrics 87, 115–143. 9
Brock, Philip L, and Liliana Rojas Suarez, 2000, Understanding the behavior of bank spreads in latin
america, Journal of development Economics 63, 113–134. 10
Calderón, César, and Lin Liu, 2003, The direction of causality between financial development and eco-
nomic growth, Journal of development economics 72, 321–334. 2
Claessens, Stijn, AslιDemirgüç-Kunt, and Harry Huizinga, 2001, How does foreign entry affect domestic
banking markets?, Journal of Banking & Finance 25, 891–911. 3,15
Claeys, Sophie, and Rudi Vander Vennet, 2008, Determinants of bank interest margins in central and
eastern europe: A comparison with the west, Economic Systems 32, 197–216. 4,5,13,15
Costa da Silva, G, J Oreiro, and L De Paula, 2007, Macroeconomic determinants of bank spread in brazil:
An empirical evaluation, Federal University of Paraná Working Paper .12
Dabla-Norris, Era, and Holger Floerkemeier, 2007, Bank efficiency and market structure: what determines
banking spreads in Armenia?, number 2007-2134 (International Monetary Fund). 3
Demirgüç-Kunt, Ash, and Harry Huizinga, 1999, Determinants of commercial bank interest margins and
profitability: some international evidence, The World Bank Economic Review 13, 379–408. 2,3,4,5,10,
Dietrich, Andreas, and Gabrielle Wanzenried, 2011, Determinants of bank profitability before and dur-
ing the crisis: Evidence from switzerland, Journal of International Financial Markets, Institutions and
Money 21, 307–327. 10
Drakos, Kostas, 2003, Assessing the success of reform in transition banking 10 years later: an interest
margins analysis, Journal of Policy Modeling 25, 309–317. 3,5
Flamini, Valentina, Miss Liliana Schumacher, and Mr Calvin A McDonald, 2009, The determinants of
commercial bank profitability in Sub-Saharan Africa, number 9-15 (International Monetary Fund).
Fungáˇcová, Zuzana, and Tigran Poghosyan, 2011, Determinants of bank interest margins in russia: Does
bank ownership matter?, Economic systems 35, 481–495. 3,5,13,15
Gounder, Neelesh, and Parmendra Sharma, 2012, Determinants of bank net interest margins in fiji, a
small island developing state, Applied Financial Economics 22, 1647–1654. 5,11,13,15
Hawtrey, Kim, and Hanyu Liang, 2008, Bank interest margins in oecd countries, The North American
Journal of Economics and Finance 19, 249–260. 5,15
Ho, Thomas SY, and Anthony Saunders, 1981, The determinants of bank interest margins: theory and
empirical evidence, Journal of Financial and Quantitative analysis 16, 581–600. 3,4
Horvath, Roman, et al., 2009, The determinants of the interest rate margins of czech banks, Czech Journal
of Economics and Finance (Finance a uver) 59, 128–136. 15
Kasman, Adnan, Gokce Tunc, Gulin Vardar, and Berna Okan, 2010, Consolidation and commercial bank
net interest margins: Evidence from the old and new european union members and candidate coun-
tries, Economic Modelling 27, 648–655. 2
Laeven, Luc, and Ross Levine, 2007, Is there a diversification discount in financial conglomerates?, Jour-
nal of Financial Economics 85, 331–367. 11
Lerner, Eugene, 1981, Discussion. the determinants of bank interest margins: Theory and empirical evi-
dence, Journal of Financial and Quantitative Analysis 26, 601–602. 4
Levine, Ross, and Sara Zervos, 1998, Stock markets, banks, and economic growth, The American Eco-
nomic Review 88, 537. 2
Liebeg, David, Markus Schwaiger, et al., 2006, Determinants of the interest rate margins of austrian
banks, Financial Stability Report 12, 104–116. 3,5,11,12,15,18
Lin, Jane-Raung, Huimin Chung, Ming-Hsiang Hsieh, and Soushan Wu, 2012, The determinants of inter-
est margins and their effect on bank diversification: Evidence from asian banks, Journal of Financial
Stability 8, 96–106. 11
Maudos, Joaquin, and Liliana Solís, 2009, The determinants of net interest income in the mexican bank-
ing system: An integrated model, Journal of Banking & Finance 33, 1920–1931. 4,5,11,13,15
Maudos, JoaquıÌ ˛An, and Juan Fernandez De Guevara, 2004, Factors explaining the interest margin in the
banking sectors of the european union, Journal of Banking & Finance 28, 2259–2281. 4,11,16
Mody, Ashoka, and Maria Soledad Martinez Peria, 2004, How foreign participation and market concen-
tration impact bank spreads: evidence from Latin America, volume 3210 (World Bank Publications). 3,
Saunders, Anthony, and Liliana Schumacher, 2000, The determinants of bank interest rate margins: an
international study, Journal of international Money and Finance 19, 813–832. 4,15
Tan, Ms Tatum Blaise Pua, 2012, Determinants of credit growth and interest margins in the Philippines
and Asia, number 12-123 (International Monetary Fund). 15
Times, Financial, 2010, Investors drawn to turkeyâ˘
Zs banking sector. 2
Valverde, Santiago Carbó, and Francisco Rodríguez Fernández, 2007, The determinants of bank margins
in european banking, Journal of Banking & Finance 31, 2043–2063. 4,8,11
Williams, Barry, 2007, Factors determining net interest margins in australia: domestic and foreign banks,
Financial Markets, Institutions & Instruments 16, 145–165. 3,5
... Bağımlı Değişken: NFM, net faiz marjını temsil etmekte olup, her bir bankanın her bir dönemdeki faiz gelirleri ile faiz giderlerinin farkının toplam aktiflere oranlanması ile hesaplanmıştır (Kansoy, 2012). (2017)). ...
... Bym değişkeni, GSYH büyüme oranını ifade etmektedir (Tarus, Chekol ve Mutwol (2012); Kansoy (2012)). Kansoy (2012) bu değişkenin NFM ile ilişkisinin literatürde değişkenlik gösterdiğini ifade etmiş ve beklenen etkinin belirsizliğine vurgu yapmıştır. ...
... Bym değişkeni, GSYH büyüme oranını ifade etmektedir (Tarus, Chekol ve Mutwol (2012); Kansoy (2012)). Kansoy (2012) bu değişkenin NFM ile ilişkisinin literatürde değişkenlik gösterdiğini ifade etmiş ve beklenen etkinin belirsizliğine vurgu yapmıştır. ...
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Çalışmanın amacı, Türk Bankacılık Sektöründe Net Faiz Marjının banka ölçeğindeki belirleyicilerini tespit etmektir. Bu amaçla 2002 4. Çeyrek ile 2017 4. Çeyrek arasında sürekli faaliyet göstermiş olan ticari bankaların verilerinden oluşan panel veri seti Driscoll-Kraay ve fark GMM tahmincileri ile analiz edilmiştir. Bulgular bankaların net faiz marjlarını açıklamada mikro değişkenlerin makro değişkenlerden daha etkili olduğunu ortaya koymaktadır. Marjların düşürülerek aracılık etkinliğinin arttırılmasında kredi riski yönetiminin, faaliyet giderlerini düşürmenin ve faaliyet çeşitlendirmesi yoluyla alternatif gelirler yaratmanın önemli olduğu görülmüştür. Ayrıca geçmişte yüksek marjlar uygulayan bankaların bu eğilimlerini devam ettirdikleri bulunmuştur. Çalışmada net faiz marjının belirleyicileri üzerinde 2008 Krizinin etkisi de incelenmiştir.
... And Buchory (2015) NPLs has positive and significant effect to Profitability. (Kansoy, 2012) found operation diversity, credit risk and operating costs are important determinants of margin in Turkey. (Plakalovic, 2015) found credit losses and the ratio o affect net interest margins. ...
... (Alkhatib, 2012) in his study to empirically examine the financial performance of five Palestinian commercial banks listed on Palestine securities exchange (PEX) found the study rejected the hypothesis claiming that there exist statistically insignificant impact of bank size, credit risk, operational efficiency and asset management on financial performance of Palestinian commercial banks. (Kansoy, 2012) found operation diversity, credit risk and operating costs are important determinants of margin in Turkey. (Plakalovic, 2015) found credit losses and the ratio of liquid assets affect net interest margins. ...
Conference Paper
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Bank BTN as a state-owned savings bank in Indonesia during the period 2010-2016 has been carrying out financial intermediation function optimally. It can be seen from ratio of loan to deposit ratio (LDR) is high compared with the national banking and other state-owned banks. But the increase in LDR is not followed by an increase in profitability. The low profitability of allegedly caused by the implementation of financial intermediation less efficient due to credit growth, funds structure and credit risk. The aim of this study is to analyze the determinants of financial intermediation efficiency including credit growth (CG), funds structure and credit risk. And its impact on profitability. Financial intermediation efficiency is measured by net interest margin (NIM), funds structure is measured by ratio time deposits to total third party funds (STPF), credit risk is measured by non performing loans (NPLs) and profitability is measured by return on assets (ROA). The methods used are descriptive and verification methods, with secondary data from financial statements of Bank BTN period 2010 – 2016. The data analysis technique used is multiple linear regression, while hypothesis testing uses T - test to examine the effect of partial independent variables and F - test to examine the effect of independent variables simultaneously. Based on the research results, it is concluded that partially, CG and STPF have positive and significant effect on NIM; while the NPLs have negative effect but not significant on NIM; Simultaneously, STPF, LDR, and NPLs significantly influence NIM with the level of 62.9%, while the remaining 37.1% is influenced by other variables. And NIM has positive and significant effect on ROA with the level of 78.3%, while the remaining 21.7% is influenced by other variables not examined in this s
... Fatih Kansoy (2012), whenever the bank is efficient and whenever there is stability in the prices of stocks there will be lower interest margin, in his paper the determinants of net interest margin in the ...
This study investigates the impact of lending on Jordanian banks' government and how it affects Jordanian banks' performance measured by return on assets (ROA) and net interest margin (NIM). The study sample is composed of all Jordanian banks non-taking into account foreign banks and Islamic banks as well during the period 2009-2014. This study applies descriptive measures and regression analysis to achieve the purpose of the study. It is expected that bank credit to the government to have a negative impact on bank performance and a positive impact on the bank net interest margin. Results show that banks that lend the government more, pr profits more, and positively impact the return on assets and positively impact net interest margin; the fact that banks with a greater level of lending manage extra risk widening their NIM.
... The findings of this study may be due to the fact that the profitability of most banks as measured by NIM could result from other factors or activities unrelated to the economic outlook of the country. This may include the competition structure of the banking sector and market power as canvassed by [34]. ...
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This study examines the effect of selected macroeconomic variables on the profitability of deposit money banks in Nigeria. The study is based on the arbitrage pricing theory (APT) propounded by Ross (1976) and secondary data was used for the study. The hypotheses were tested using the OLS multiple regression analysis and results reveal that, Interest rate (H0 1) with B =-0.254, t =-0.237, p = .819; Exchange rate (H0 2) with B =-0.076, t =-2.093, p = .075 Gross domestic product (H0 3) with B = 0.643, t = 0.545, p = .602 and Inflation rate (H0 4) with B = 0.182, t = 0.343, p = .743 are not significant predictor of Net interest margin. The implication is that, the selected macroeconomic variables are not a significant predictor of deposit money bank profitability for the period of study.
... Selain itu, standar akuntansi yang tidak memadai dan klasifikasi yang tidak tepat dari ketentuan mengenai NPL juga dapat membuat konsep risiko kredit tidak relevan. Penelitian lain menunjukan bahwa NPL yang tinggi akan mengurangi pendapatan bank, sehingga menurunkan net interest margin karena bank tidak mempunyai cadangan kredit yang memadai dan meningkatnya provisi (Kamila, 2015). Oleh karena itu, dapat dikatakan teori-teori yang bertentangan ini menyeimbangkan satu sama lain sehingga pengaruh dari risiko kredit terhadap net interest margin menjadi tidak signifikan. ...
ABSTRAK Tujuan penelitian – Penelitian ini bertujuan untuk menganalisis pengaruh risiko kredit dan risiko likuditas terdapat net interest margin sesuai pertumbuhan ekonomi pada bank umum di Indonesia periode 2010-2017. Desain/Metodologi/Pendekatan – Metode analisis yang digunakan adalah metode analisis fixed effect model GLS Temuan – Hasil penelitian menunjukkan pertumbuhan ekonomi memiliki pengaruh yang negatif terhadap net interest margin, risiko kredit memiliki pengaruh yang negatif tetapi tidak signifikan terhadap net interest margin, risiko likuiditas memiliki pengaruh yang positif terhadap net interest margin, risiko kredit sesuai pertumbuhan ekonomi memiliki pengaruh yang negatif terhadap net interest margin, risiko likuiditas sesuai pertumbuhan ekonomi memiliki pengaruh yang negatif terhadap net interest margin, interaksi risiko kredit dengan risiko likuiditas berpengaruh positif tetapi tidak signifikan terhadap net interest margin, dan interaksi risiko kredit dengan risiko likuiditas sesuai pertumbuhan ekonomi memiliki pengaruh yang negatif tetapi tidak signifikan terhadap net interest margin Keterbatasan penelitian – Penelitian ini hanya menggunakan sampel 58 bank umum konvensional, Penelitian ini tidak mengklasifikasikan tipe kepemilikan sebagai bank domestik dan bank asing dan penelitian ini hanya meneliti sebagian faktor-faktor yang mempengaruhi net interest margint. Originality/value – Penelitian ini menggunakan sejumlah variabel yaitu pertumbuhan ekonomi, risiko kredit, risiko likuiditas, risiko kredit sesuai pertumbuhan ekonomi, risiko likuiditas sesuai pertumbuhan ekonomi, interaksi risiko kredit dengan risiko likuiditas, interaksi risiko kredit dengan risiko likuiditas sesuai pertumbuhan ekonomi. Variabel kontrol pada penelitian ini adalah beban bank, modal bank, dan ukuran bank Keywords: Bank, net interest margin, pertumbuhan ekonomi, risiko kredit, risiko likuiditas
... They also point to the fact that foreign banks charge higher NIMs. Findings of Kansoy (2012) suggest that operation diversity, credit risk and operating costs are significant determinants of NIM. Yüksel and Zengin (2017) analyze the 2003-2014 period and suggest that NIMs is negatively related with noninterest income and non-performing loans, total assets and exchange rates. ...
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This paper investigates the impact of financial crisis on the determinants of bank interest rate margin (NIM) in Turkey over the period 1995-2018. Turkey witnessed two recent major economic crises, a local crisis in 2001 and the global crisis in 2008. The sample period is divided into three sub-periods: pre-crisis period (1995-2001), post-local crisis period (2002-2007) and post-global crisis period (2008-2018). The NIMs are specified as a function of bank and market-specific variables, such as operating cost, liquidity, credit risk, implicit interest payments, size, managerial efficiency, and concentration. The results of the analysis show that determinants of NIMs following the local crisis and global crisis are significantly changed. After the local crisis credit risk levels were considered more crucial and costs and efficiency is considered as the focus in the aftermath of the global financial crisis.
... 3. For studies examining the determinants of net interest margins in the Turkish banking industry, see Kaya (2002), Erol (2007), Abbasoglu, Aysan and Gunes (2007), Aysan, Dalgıc and Demirci (2010), Ozdincer and Ozyıldırım (2010), Ugur and Erkus (2010), Kansoy (2012), Konar (2014), Yılmaz (2017), Yuksel and Zengin (2017). ...
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This paper tests whether Turkish banks respond asymmetrically to the global crisis with respect to their ownership using bank-level data during 2002Q4-2013Q3 period and employing panel estimation techniques. The dependent variables are selected financial ratios on capital adequacy, asset quality, liquidity, profitability, balance sheet and income-expenditure structure. Main determinants are bank-specific control variables on overdue loans, overhead costs, FX open position and bank size as well as dummy variables for bank listing and bank age. Other determinants include GDP growth, inflation, exchange rate, policy rate and required reserves, which reflect the impact of macroeconomic conditions and the monetary policy on bank structure. Estimation results suggest that Turkish banks respond asymmetrically to the global crisis with respect to their ownership. This result can be attributed to structural, institutional and historical factors , which cause macroeconomic and policy-related explanatory variables to have uneven effects on banks before and after the global crisis. Meanwhile, the impacts of bank-specific determinants are also observed to be disproportionate across different ownership categories between the pre-crisis and the post-crisis periods. These findings highlight the importance of analyzing the Turkish banking sector by an ownership breakdown in order to detect the asymmetric response and the paper also emphasizes the need to perform the analysis by sub-periods to be able to capture the effect of the global crisis.
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The aim of this study is to explore both the bank-specific and macroeconomic drivers of net interest margins using panel data techniques for a sample of 12 deposit banks publicly traded on the Borsa Istanbul over the post-crisis period 2010-2015. Our panel data results suggest that while bank size and managerial efficiency affect net interest margins negatively and significantly, operating cost, credit risk, and implicit interest payments influence the NIMs positively and significantly in the post-crisis era. The results also imply that macroeconomic indicators such as economic growth and inflation do not have any significant effects on the NIMs.
Increasing foreign participation and high concentration levels characterize the recent evolution of banking sectors' market structures in developing countries. We analyze the impact of these factors on Latin American bank spreads during the late 1990s. Our results suggest that foreign banks were able to charge lower spreads relative to domestic banks. This was more so for de novo foreign banks than for those that entered through acquisitions. The overall level of foreign bank participation seemed to influence spreads indirectly, primarily through its effect on administrative costs. Bank concentration was positively and directly related to both higher spreads and costs.
Despite robust deposit growth, credit growth has been sluggish in the Philippines. We attribute this to legacy weaknesses in bank balance sheets, consumption-led economic growth, and relatively high net interest margins. Bank-level analysis suggests that interest margins in the Philippines rise with bank size, bank capitalization, foreign ownership, overhead costs and tax rates. Using bank-level data for a number of Asian economies, we find that higher growth, lower inflation, higher reserve requirements, greater banking sector development, smaller stock market development and lower government deficits reduce net interest margins, informing the policy debate on strengthening financial intermediation in the Philippines.
An endogenous switching regression model is employed for this study, categorizing the banks into regimes of high and low degrees of diversification, with our results indicating that net interest margins can be less sensitive to fluctuations in bank risk factors for functionally diversified banks as compared to more specialized banks. In turn, this implies that by diversifying their income sources, these banks can reduce the shocks to net interest margins arising from idiosyncratic risk. Our results show that prior findings can hold when the banks are located in a regime with a low degree of diversification.
This article investigates the determinants of Net Interest Margins (NIM) of banks in Fiji, a Small Island Developing State (SIDS) in the South Pacific, over the period 2000–2010. Based mainly on the Ho and Saunders’ (1981) dealership model and extensions thereto, this study uses a number of panel data estimation techniques to control for possible heterogeneity across banks and various assumptions about errors. Consistent with the theoretical model, NIM has a positive association with implicit interest payment, operating cost, market power and credit risk, and a negative association with the quality of management and liquidity risk. However, the association with bank capital and opportunity cost of required reserves do not conform to expectations. Policy implications are discussed.
This paper analyzes interest margin determinants in the Russian banking sector with a particular emphasis on the bank ownership structure. Using a unique bank-level data covering Russia’s entire banking sector for the 1999−2007 period, we find that the impact of a number of commonly used determinants such as market structure, credit risk, liquidity risk and size of operations differs across state-controlled, domestic-private and foreign-owned banks. At the same time, the influence of operational costs and bank risk aversion is homogeneous across ownership groups. The results overall suggest the form of bank ownership needs to be considered when analyzing interest margin determinants.
Bank profits are high in Sub-Saharan Africa (SSA) compared to other regions. This paper uses a sample of 389 banks in 41 SSA countries to study the determinants of bank profitability. We find that apart from credit risk, higher returns on assets are associated with larger bank size, activity diversification, and private ownership. Bank returns are affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation and stable output growth does boost credit expansion. The results also indicate moderate persistence in profitability. Causation in the Granger sense from returns on assets to capital occurs with a considerable lag, implying that high returns are not immediately retained in the form of equity increases. Thus, the paper gives some support to a policy of imposing higher capital requirements in the region in order to strengthen financial stability.
Using the GMM estimator technique described by Arellano and Bover (1995), this paper analyzes the profitability of 372 commercial banks in Switzerland over the period from 1999 to 2009. To evaluate the impact of the recent financial crisis, we separately consider the pre-crisis period, 1999-2006, and the crisis years of 2007-2009. Our profitability determinants include bank-specific characteristics as well as industry-specific and macroeconomic factors, some of which have not been considered in previous studies. The inclusion of these additional factors as well as the separate consideration of the crisis years allow us to gain new insights into what determines the profitability of commercial banks.
This study analyzes financial liberalization measures undertaken in 1990, of which an opening to foreign investment was a major component. After a brief description of the major changes in legislation on foreign investment, we compare performance of foreign-owned vs. domestic banks, first using a descriptive approach, then in a more systematic manner using econometric analysis. Panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in Colombia, by increasing competition, lowering intermediation costs and improving loan quality. Although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors, foreign (and domestic) entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition. However, the greater competition may have resulted in increased risk and a subsequent deterioration in loan quality, particularly among domestic banks.