Determinants of Commercial Banks’ Interest Rate Spread in Namibia: An Econometric Exploration

Abstract

This paper investigates the determinants of commercial banks interest rate spread in Namibia, using a panel data analysis of bank level dada. It applied the OLS technique to identify the bank-specific variables that have been influencing interest rate spread in Namibia over the period 2004 – 2011. The results of the study indicate that deposit market share, liquidity
levelsand operating costs are the main bank-specific determinants of   interest rate spread in Namibia. More specifically, it was found that the deposit market share and operating costs reduces net interest margin whilst the liquidity levels of a commercial bank increases its net interest margin. Furthermore, it was revealed that the tax paid by a bank, non-performing loans and the capital ratio are not important determinants of the net interest margin.The foregoing implies that the monetary authority in Namibia should place emphasis on the policies aimed at reducing the liquidity levels in the banking industry, which will reduce the net interest margins. This is especially important for both banks and consumers alike. It is also found that it is imperative to focus on policies that promote a low interest rate environment, as these would reduce the interest margins in the economy.

Keywords: Interest rate spread, commercial banks, Namibia.