1. 2 $5,000 $50 m 8% 5% interest spread difference between the contractual interest rates charged on...
Post on 18-Jan-2016
217 Views
Preview:
TRANSCRIPT
D.M.Jayasena
School of Management
RESEARCH STUDY PRESENTATION
1
by
THE DETERMINANTS OF NET INTEREST MARGIN IN THE SRI LANKAN BANKING SYSTEM
Advisor: Dr. Winai Wongsurawat
2
What do Banks do for Their Customers?
FINANCIAL INTERMEDIATION
$5,000$50 M
8%5%
4
Efficiency of the Financial Intermediaries
Interest Spread
Difference between the contractual interest rates charged on loans and rates paid on deposits
Net Interest Margin (Ex post spread)
Difference between banks' actual interest revenues and actual interest expenses to the banks’ average assets or total assets.
5
Bank Interest Spread in Sri Lanka 1990 -2008
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
4
8
12
16
20
24
14.10
9.89 5.27
21.46
8.95
Average Deposit Rate % Average Lending Rate %
Inte
rest
r
ate
%
Source: CBSL statistical database
Interest Spread
6
Interest Spread in South Asian Countries 2002 - 2005
2002 2003 2004 20050
1
2
3
4
5
3.8
4.7
4.2 4.2
India Pakistan
Bangladesh Sri Lanka
%
Source: Central Bank Annual Report – 2006, Sri Lanka
7
Bank Net Interest Margin in Sri Lanka - 2008
Bank Name Net Interest Margin % Bank of Ceylon 2.83
Commercial Bank Ltd 4.57
Hatton National Bank 4.97
People's Bank 4.77
Sampath Bank 4.80
Seylan Bank 4.68
Nations Trust Bank 4.29
National Development Bank 4.55
National Saving Bank 3.26
Pan Asia Bank 5.62
Union Bank 2.91
Source: Author’s calculation based on bank’s annual reports
8
Where is the problem ?
Size
High Operations Cost
High Credit Risk
Low GDP growth Rate
Volatility of Interest Rate
Less competition
Inefficiency of the Management ?
High reserve requirements ?
Ownership?
Non-diversified income sources
?
9
Data Sources
Basically data was collected from the secondary sources including;
1. Commercial Banks Annual Reports,
2. Annual publications of the Central Bank of Sri Lanka (CBSL)
3. Databases maintaining by Asian Development Bank and the World Development Bank
4. Online sources
10
Dataset
11 major commercial banks including three state-owned banks.
Period from 1999 to 2008
103 bank annual observations.
Represented more than 85% of the deposit market and 72% of the loan market
Methodology
NIMi,t = + Bi,t + Ct + Mt + i,t
Net Interest Margin(NIM)
Bank characteristics (B), market structure (C), and macroeconomic variables (M) as regressors
GLS and Fixed effects regressionRobust clustered standard errors
12
Dependent Variable
Net Interest Margin
Difference between total interest income and expenses over Total assets
NIM = (Interest income – Interest expenses) Total assets
13
Independent Variables
Independent Variables (Explanatory Variables)
Explanatory Variables
Macroeconomic and industry
Specific Variables
Bank Specific
Variables
14
Independent Variables
Bank specific variables
1. Operating Cost (OC) (+)
2. Credit Risk (CR) (+)
4. Opportunity Cost (OPT) (+)
5. Managerial efficiency (ME) (-)
15
Independent Variables (Cont)
Bank specific variables;
6. Scale effects (SIZE) (-)
7. Diversification effect (NIIN) (-)
8. Market share (MSHARE) (+)
9. Bank ownership (OWNER) (Dummy)
16
Macroeconomic and Industry specific variables
Market structure (CONA)
1. 3- bank concentration ratio in terms of total assets (CONA)(+)
Macroeconomic Variables
2. GDP growth rate (GDPR) (+)
2. Market interest rate (MIR) (+/-)
17
(1) (2) Base Model
Variables Coefficient P >z Coefficient P >z
Constant -0.022 0.017 ** -0.013 0.394
OC 0.372 0.000 *** 0.695 0.000 ***CR 0.107 0.000 *** 0.125 0.000 ***NIIN -0.016 0.025 ** -0.031 0.000 ***
OPT -0.002 0.920 -0.008 0.534
ME -0.024 0.051 * -0.070 0.000 ***OWNER 0.001 0.772 0.002 0.306
SIZE 0.004 0.000 *** 0.004 0.000 ***
GDPR - - 0.129 0.000 ***MIR - - -0.055 0.004 ***CONA - - -0.015 0.508
R-squared 0.461 0.600
Wald chi2 63.1 138
Prob > chi2 0.000 0.000
Generalized Least Square (GLS) regression (Random-effects)
*** Significant at 1%; ** Significant at 5%; *Significant at 10%
Results
Where is the problem ? - Results
High Operations
CostHigh Credit
Risk
Size
Higher Demand for Loan
Interest Rate
Less competition
Inefficiency of the Management
Non-diversified income sources
?
High reserve requirements
Ownership
19
Results (Cont)
Coefficient of non-interest income reflects the importance of diversified income sources for a bank rather than depending on single source of interest income.
Size variable proxy for economies of scale positively relates with NIM
Negative coefficient of market interest rate variable (MRISK) shows that deposit rate in Sri Lanka relatively sensitive with falling interest rate than lending rate.
Even though 3-bank concentration ratio or industry structure doesn’t allow to grab a higher margins, commercial banks in Sri Lanka use their market power for pricing decisions
20
Results and Conclusion
Finally;
The main root causes for higher interest margin and spread are high
Operations cost
Less competition of the industry
Non–diversified income sources
Absence of alternative financial sources.
21
Recommendations
Promoting competition and improve operations efficiencies areis an urgent matters for the industry.
Displaying the lending rate and deposits rate in their business permission
Promoting foreign entry may be a plausible solution to exert downward pressure on bank interest margins through improved operations efficiencies.
Diversify bank’s business activities beyond the traditional core activities
Promoting and developing other financial sources such as bond market is another plausible solution
22
Recommendations (Cont)
Weak and cumbersome legal procedures add extra cost to the financial system. Therefore impose and enact necessary legal reforms are essential.
Implement proper methods to assess credit worthiness of their customers based on the collateral or type of intended project, it would lead to reduce the intermediation margin.
Authorities should monitor strictly capital adequacy standard and systematic supervision to maintain the stability of the industry.
In addition to that, authorities should try to maintain stable macroeconomic environment
23
Future Research Directions
Some important variables such as effectiveness of legal system, policy changes in taxation etc can be included in this study
Further, return on competing instrument and development of bond and capital market can be incorporated in to this model
Extend the research to identify cross country determinants factors in the south Asian region.
24
top related