Determinants of commercial banks' interest rate spreads in Botswaana

Abstract

This study investigates the determinants of commercial banks’ interest rate spread using time series cross-sectional analysis for the period of 2004Q1 to 2014Q4. It reveals that Botswana’s bank charges are high by regional standards. Hence, the study has empirically tested the factors that lead to high interest rate spreads in Botswana using bank specific, industry-specific and macroeconomic data. The empirical results indicate that bank size, intermediation, GDP and inflation lead to a rise in narrow interest rate spread while tax and effect of the financial crisis have a negativecorrelation with narrow interest rate spread. All these effects are statistically significant. The study also finds that interest rate spread negatively and significantly impact on bank performance in Botswana. This is so because what drives the level of interest rate spread in Botswana are more of macroeconomic factors that are inimical to bank performance. The study, therefore, recognizes the importance of maintaining stable macroeconomic factors like inflation and GDP which is conducive for the high level of financial intermediation.