Financial Intermediation Costs in Low-Income Countries: The Role of Regulatory, Institutional, and Macroeconomic Factors
IMF Working Papers, May 1, 2012
Source details
- Canonical URL
- Financial Intermediation Costs in Low-Income Countries: The Role of Regulatory, Institutional, and Macroeconomic Factors
Other formats
Bibliographic details
- Authors: Tigran Poghosyan
- Published: May 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475503937.001
Summary and central findings
- Study analyzes factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) country comparators.
- Uses the net interest margin as a proxy for financial intermediation costs at the bank level.
- Within LICs, a substantial part of the variation in interest margins can be explained by bank-specific factors:
- Margins tend to increase with higher riskiness of credit portfolio.
- Margins tend to increase with lower bank capitalization.
- Margins tend to increase with smaller bank size.
- Overall, concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses are identified as the key impediments preventing financial intermediation costs from declining.
- The results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.
Methodology and scope
- Proxy for intermediation costs: net interest margin at the bank level.
- Comparative focus: low-income countries (LICs) versus emerging markets (EMs).
Policy implications and recommendations
- Foster banking competition to reduce concentrated market structures that sustain high intermediation costs.
- Strengthen institutional frameworks to address institutional weaknesses that impede cost reductions.
- Address bank-specific vulnerabilities:
- Reduce credit portfolio risk to lower margins.
- Improve bank capitalization to contain margins.
- Support growth in bank size or scale efficiencies to reduce margins.
Keywords and subjects covered
- Subjects: Banking, Competition, Credit risk, Financial markets, Financial regulation and supervision, Inflation, Loan loss provisions, Monetary policy, Prices, Reserve requirements
- Keywords: bank characteristic, bank efficiency, Banks, Competition, Credit risk, dependent variable, Emerging Economies, entry application, Inflation, interest margin, intermediation service, LICS bank, Loan loss provisions, Low Income Countries, margin determinant, Net Interest Margins, Reserve requirements, Western Hemisphere, WP