IDEAS home Printed from https://ideas.repec.org/p/koe/wpaper/2014.html
   My bibliography  Save this paper

The Determinants of Net Interest Margins of Commercial Banks: Panel Evidence from China, India and Japan

Author

Listed:
  • Md. Shahidul Islam

    (Department of Banking and Insurance, University of Dhaka)

  • Shin-Ichi Nishiyama

    (Graduate School of Economics, Kobe University)

Abstract

The study examines the determinants of net interest margins of commercial banks of China, India and Japan. Using the cross-country panel data of 418 commercial banks during the period of 2011 to 2017 (practically the post global financial crisis period); we classified the determinants as bank-specific, industry specific and macroeconomic-specific variables. In line of the ‘dealership model of margin determination’ of Ho and Saunders (1981) and its later extensions, we viewed net interest margins or spread as a function of liquidity, profitability, credit risk, risk aversion, size, business growth, regulatory response and off- balance sheet income in the bank-specific cluster whereas the industry concentration in industry specific cluster and call money rate, inflation and GDP growth rate in macroeconomic clusters. We found evidence that liquidity, profitability, risk aversion, required reserve ratio, yield spread and GDP affect interest margins positively but size and rate of inflation negatively. Our empirical findings support the traditional structure-conduct-performance (SCP) hypothesis of Bain (1956) for the banking markets of China, India and Japan for the post global financial crisis (GFC) era.

Suggested Citation

  • Md. Shahidul Islam & Shin-Ichi Nishiyama, 2020. "The Determinants of Net Interest Margins of Commercial Banks: Panel Evidence from China, India and Japan," Discussion Papers 2014, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:2014
    as

    Download full text from publisher

    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2020/2014.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kutan, Ali M. & Ozsoz, Emre & Rengifo, Erick W., 2012. "Cross-sectional determinants of bank performance under deposit dollarization in emerging markets," Emerging Markets Review, Elsevier, vol. 13(4), pages 478-492.
    2. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," The World Bank Economic Review, World Bank, vol. 13(2), pages 379-408, May.
    3. Reint Gropp & Christoffer Kok & Jung-Duk Lichtenberger, 2014. "The Dynamics of Bank Spreads and Financial Structure," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-53.
    4. Athanasoglou, Panayiotis P. & Brissimis, Sophocles N. & Delis, Matthaios D., 2008. "Bank-specific, industry-specific and macroeconomic determinants of bank profitability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 121-136, April.
    5. Fungáčová, Zuzana & Poghosyan, Tigran, 2011. "Determinants of bank interest margins in Russia: Does bank ownership matter?," Economic Systems, Elsevier, vol. 35(4), pages 481-495.
    6. Stewart, Chris & Matousek, Roman & Nguyen, Thao Ngoc, 2016. "Efficiency in the Vietnamese banking system: A DEA double bootstrap approach," Research in International Business and Finance, Elsevier, vol. 36(C), pages 96-111.
    7. Lerner, Eugene M., 1981. "Discussion: The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 601-602, November.
    8. Berger, Allen N, 1995. "The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 404-431, May.
    9. Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 1047-1077, October.
    10. Md. Shahidul Islam & Shin-Ichi Nishiyama, 2016. "The Determinants of Bank Profitability: Dynamic Panel Evidence from South Asian Countries," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(3), pages 1-6.
    11. MENDES Victor & ABREU Margarida, 2010. "Do Macro-Financial Variables Matter for European Bank Interest Margins and Profitability?," EcoMod2003 330700101, EcoMod.
    12. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
    13. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    14. Allen, Linda, 1988. "The Determinants of Bank Interest Margins: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 231-235, June.
    15. Saunders, Anthony & Schumacher, Liliana, 2000. "The determinants of bank interest rate margins: an international study," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 813-832, December.
    16. Tarsila Segalla Afanasieff & Priscilla Maria Villa Lhacer & Márcio I. Nakane, 2002. "The Determinants of Bank Interest Spread in Brazil," Money Affairs, CEMLA, vol. 0(2), pages 183-207, July-Dece.
    17. Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.
    18. Richard Adjei Dwumfour, 2018. "Explaining banking spread," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 11(1), pages 139-156, September.
    19. Dario Focarelli & Fabio Panetta, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits," American Economic Review, American Economic Association, vol. 93(4), pages 1152-1172, September.
    20. Hawtrey, Kim & Liang, Hanyu, 2008. "Bank interest margins in OECD countries," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 249-260, December.
    21. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    22. Pasiouras, Fotios & Kosmidou, Kyriaki, 2007. "Factors influencing the profitability of domestic and foreign commercial banks in the European Union," Research in International Business and Finance, Elsevier, vol. 21(2), pages 222-237, June.
    23. Carbo Valverde, Santiago & Rodriguez Fernandez, Francisco, 2007. "The determinants of bank margins in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2043-2063, July.
    24. King, Michael R., 2013. "The Basel III Net Stable Funding Ratio and bank net interest margins," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4144-4156.
    25. Kaiguo Zhou & Michael C. S. Wong, 2008. "The Determinants of Net Interest Margins of Commercial Banks in Mainland China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(5), pages 41-53, September.
    26. Bouzgarrou, Houssam & Jouida, Sameh & Louhichi, Waël, 2018. "Bank profitability during and before the financial crisis: Domestic versus foreign banks," Research in International Business and Finance, Elsevier, vol. 44(C), pages 26-39.
    27. Hesse, Heiko, 2007. "Financial intermediation in the pre-consolidated banking sector in Nigeria," Policy Research Working Paper Series 4267, The World Bank.
    28. Fabio Panetta & Dario Focarelli, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Italian Market for Bank Deposits," CEIS Research Paper 10, Tor Vergata University, CEIS.
    29. Ming Qi & Jiawei Zhang, 2018. "What Determines Interest Margins? The Case of Chinese Banks," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Myriam García-Olalla & Judith Clifton (ed.), Contemporary Issues in Banking, chapter 0, pages 239-251, Palgrave Macmillan.
    30. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
    31. Degryse, Hans & Kim, Moshe & Ongena, Steven, 2009. "Microeconometrics of Banking Methods, Applications, and Results," OUP Catalogue, Oxford University Press, number 9780195340471.
    32. Özcan IŞIK & Murat BELKE, 2017. "An Empirical Analysis of the Determinants of Net Interest Margins of Turkish Listed Banks: Panel Data Evidence from Post-Crisis Era," Sosyoekonomi Journal, Sosyoekonomi Society, issue 25(34).
    33. McShane, R. W. & Sharpe, I. G., 1985. "A time series/cross section analysis of the determinants of Australian trading bank loan/deposit interest margins: 1962-1981," Journal of Banking & Finance, Elsevier, vol. 9(1), pages 115-136, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Islam, Md. Shahidul & Nishiyama, Shin-Ichi, 2016. "The determinants of bank net interest margins: A panel evidence from South Asian countries," Research in International Business and Finance, Elsevier, vol. 37(C), pages 501-514.
    2. Saona, Paolo, 2016. "Intra- and extra-bank determinants of Latin American Banks' profitability," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 197-214.
    3. Martins, António Miguel & Serra, Ana Paula & Stevenson, Simon, 2019. "Determinants of real estate bank profitability," Research in International Business and Finance, Elsevier, vol. 49(C), pages 282-300.
    4. Naceur, Sami Ben & Omran, Mohammed, 2011. "The effects of bank regulations, competition, and financial reforms on banks' performance," Emerging Markets Review, Elsevier, vol. 12(1), pages 1-20, March.
    5. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    6. Philip Molyneux & Alessio Reghezza & Ru Xie, 2018. "Bank Profits and Margins in a World of Negative Rates," Working Papers 18001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    7. Raja Almarzoqi & Sami Ben Naceur, 2015. "Determinants of Bank Interest Margins in the Caucasus and Central Asia," IMF Working Papers 2015/087, International Monetary Fund.
    8. Jugnu Ansari & Ashima Goyal, 2014. "Bank Competition, Managerial Efficiency and the Interest Rate Pass-Through in India," Contemporary Studies in Economic and Financial Analysis, in: Risk Management Post Financial Crisis: A Period of Monetary Easing, volume 96, pages 317-339, Emerald Group Publishing Limited.
    9. Mimouni, Karim & Smaoui, Houcem & Temimi, Akram & Al-Azzam, Moh'd, 2019. "The impact of Sukuk on the performance of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 42-54.
    10. Trinugroho, Irwan & Agusman, Agusman & Tarazi, Amine, 2014. "Why have bank interest margins been so high in Indonesia since the 1997/1998 financial crisis?," Research in International Business and Finance, Elsevier, vol. 32(C), pages 139-158.
    11. Murad Khan & Abdul Jalil, 2020. "Determinants of Interest Margin in Pakistan: A Panel Data Analysis," Economies, MDPI, vol. 8(2), pages 1-14, March.
    12. Arnold, Ivo J.M. & van Ewijk, Saskia E., 2012. "The quest for growth: The impact of bank strategy on interest margins," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 18-27.
    13. Yanikkaya, Halit & Gumus, Nihat & Pabuccu, Yasar Ugur, 2018. "How profitability differs between conventional and Islamic banks: A dynamic panel data approach," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 99-111.
    14. Fungáčová, Zuzana & Poghosyan, Tigran, 2011. "Determinants of bank interest margins in Russia: Does bank ownership matter?," Economic Systems, Elsevier, vol. 35(4), pages 481-495.
    15. Pankaj Sinha & Sakshi Sharma, 2016. "Determinants of bank profits and its persistence in Indian Banks: a study in a dynamic panel data framework," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 7(1), pages 35-46, March.
    16. Kusi, Baah Aye & Agbloyor, Elikplimi Komla & Gyeke-Dako, Agyapomaa & Asongu, Simplice Anutechia, 2020. "Financial Sector transparency and net interest margins: Should the private or public Sector lead financial Sector transparency?," Research in International Business and Finance, Elsevier, vol. 54(C).
    17. Birchwood, Anthony & Brei, Michael & Noel, Dorian M., 2017. "Interest margins and bank regulation in Central America and the Caribbean," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 56-68.
    18. Nguyen Duy Suu & Thu-Quang Luu & Kim-Hung Pho & Michael McAleer, 2020. "Net Interest Marginof Commercial Banks in Vietnam," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(1), pages 1-27, March.
    19. Nguyen, Thach V.H. & Nguyen, Thai Vu Hong, 2022. "How do banks price liquidity? The role of market power," Global Finance Journal, Elsevier, vol. 53(C).
    20. Martins, António Miguel & Correia, Pedro & Gouveia, Ricardo, 2023. "Russia-Ukraine conflict: The effect on European banks’ stock market returns," Journal of Multinational Financial Management, Elsevier, vol. 67(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:koe:wpaper:2014. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kimiaki Shirahama (email available below). General contact details of provider: https://edirc.repec.org/data/fekobjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.