The Determinants of Net Interest Margin in the Turkish Banking Sector: Does Bank Ownership Matter?

Year 2012, Volume: 6 Issue: 2, 13 - 49, 01.12.2012

Fatih Kansoy

Abstract

This research presented an empirical investigation of the determinants of the net interest margin in Turkish Banking sector with a particular emphasis on the bank ownership structure. This study employed a unique bank-level dataset covering Turkey`s commercial banking sector for the 2001-2012. Our main results are as follows. Operation diversity, credit risk and operating costs are important determinants of margin in Turkey. More efficient banks exhibit lower margin and also price stability contributes to lower margin. The effect of principal determinants such as credit risk, bank size, market concentration and inflation vary across foreign-owned, state-controlled and private banks. At the same time, the impacts of implicit interest payment, operation diversity and operating cost are homogeneous across all banks.

Keywords

Banks, Turkish Banking Sector,, Interest Rate Margin

References

• Allen, L. (1988) The Determinants of Bank Interest Margins: A Note. International Journal of Financial and Quantitative Analysis, 23 (2), p.231-235.
• Angbazo, L. (1997) Commercial Bank Net Interest Margin s, Default Risk, Interest Rate Risk And Off-Balance Sheet Banking. Journal of Banking and finance, 21 p.55-87.
• Arellano, M. and Bover, O. (1995). Another Look At The Instrumental-Variable Estimation Of Error-Components Models. Journal of Econometrics, 68 (1), p.29-51.
• Aysan, A. and Ceyhan, S. (2008) What Determines the Banking Sector Performance in Globalized Financial Markets: The Case of Turkey. Physica A Statistical Mechanics and its Applications, 387 p.1593-1602.
• Aysan, A. and Dalkilic, C. (2009) Macroeconomic, Sector Specific and Bank Specific Determinants of Net Interest Rate Margin: What Matters More for an Emerging Market Economy. EconMod 2009 Paper.
• Baltagi,B.H. (2008). Forecasting with Panel Data. Journal of Forecasting, 27, p.153-173.
• Barajas, A. and Steiner, R. (2000) The Impact of Liberalization and Foreign Investment in Colombia`s Financial Sector. Journal of Development Economics, 63 p.157-196.
• Blundell,R.and Bond, S. (2000) GMM Estimation with Persistent Panel Data: An Application to production Functions. Econometric Reviews,19, p.321-340.
• Boone, J. and Weigand, J. (2000) Measuring Competition in the Dutch Manufacturing Sector: How are Cost Differentials Mapped into Profit Differentials. CPB Working Paper, 131.
• Brock, P. and Rojas-Suarez, L. (2000) Understanding the Behaviour of Bank Margins in European Banking. Journal of Development Economics, 63 p.113-134.
• Calderon, C. and Liu, L. (2002) The Direction of Causality between Financial Development and Economic Growth. Working Papers of Central Bank of Chile, (184).
• Carbo, S. and Rodriguez, F. (2007) The Determinants of Bank Margins in European Banking. Journal of Banking and finance, 31 p.2043-2063.
• Claessens, S. and Demirguc-Kunt, A. (2001) How Does Foreign Entry Affect Domestic Banking Markets? Journal of Banking and finance, 25 (891-911).
• Claeys, S. and Vander Vennet, R. (2008) Determinants of Bank Interest Margins in Central and Eastern Europe: A Comparison with the West. Economic System, 07 (134).
• Dabla-Norris E. and Floerkemeier H. (2007) Bank Efficiency and Market Structure: What Determines Banking Spread in Armenia? IMF Working Review, 13 (2), p.379-408.
• Demirguc-Kunt, A. and Huizinga, H. (1999) Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence. The World Bank Economic Review, 13 (2), p.379-408.
• Dietrich, A. and Wanzenried, G. (2011) Determinants of Bank Profitability Before And During The Crisis: Evidence From Switzerland. Journal of International Financial Markets, Institutions & Money, 21 p.307-327.
• Drakos, K. (2003) Assessing The Success Of Reform In Transition Banking 10 Year Later: An Interest Margin Analysis. Journal of Policy Modeling, 25 p.309-317.
• Financial Times (2010) Investors Drawn to Turkey’s Banking Sector. [online] Available at: http://www.ft.com/cms/s/0/371894a6-dd34-11df-9236- 00144feabdc0.html#axzz29Iwt6nwC [Accessed: 01 Oct 2012].
• Flamini, V. and McDonald, C. (2009) The Determinants of Commercial Bank Profitability in Sub-Saharan Africa. IMF Working Paper, 15.
• Fungacova, Z. and Poghosyan, T. (2011) Determinants Of Bank Interest Margins In Russia: Does Bank Ownership Matter? Economic Systems, 35, p 481-495
• Gounder, N. and Sharma, P. (2012) Determinants Of Bank NIMs In Fiji, A Small Island Developing State. Applied Financial Economics, 22 (19), p.1647-1654.
• Hawtrey, K. and Liang, H. (2008) Bank Interest Margins In OECD Countries. North American Journal of Economics and Finance, 46 p.249-260.
• Horvath, R. (2009) The Determinants of the Interest Margins of Czech Banks. Czech Journal of Economics and Finance, 59 (2), p.128-136.
• Kasman, A. and Tunc, G. (2010) Consolidation And Commercial Bank NIMs: Evidence From The Old And New European Union Members And Candidate Countries. Economic Modelling, 27 p.648-655.
• Khawaja, M. and Din, M. (2007) Determinants Of Interest Spreads In Pakistan. The Pakistan Development Review, p.129-143.
• Laeven, L. and Levine, R. (2007) Is There A Diversification Discount In Financial Conglomerates? Journal of Financial Economics, 85 (2), p. 331–367.
• Lerner, E. (1981) Discussion. The Determinants Of Bank Interest Margins: Theory And Empirical Evidence. Journal of Financial and Quantitative Analysis, 26 (601-602).
• Levine, R. and Zervos, S. (1998) Stock Markets, Banks and Economic Growth. American Economic Review, 88 (3), p.537-558.
• Liebeg, D. and Schwaiger, M. (2006) Determinants Of The Interest Rate Margins Of Austrian Banks. OeNB Financial Stability Report, 12 p.104-116.
• Martinez Peria, M. and Mody, A. (2004) How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America. Journal of Money, Credit and Banking, 36 (3), p.511-537.
• Maudos, J. and de Guevara, J. (2004) Factors Explaining the Interest Margin in the Banking Sectors of the European Union. Journal of Banking and finance, 28 (2259-2281).
• Maudos, J. and Solisa, L. (2009) The Determinants Of The Net Interest Income In The Mexican Banking System: An Integrated Model. Journal of Banking and finance, 33 p.1920-1931.
• Saunders, A. and Schumacher, L. (2000) The Determinants Of Bank Interest Margins: An International Study. Journal of International Money and Finance, 19 p.813-832.
• Schwaiger, M. and Liebeg, D. (2008) Determinants of Bank Interest Margins In Central And Eastern Europe. OeNB Financial Stability Report.
• Silva, G. and Oreiro, J. (2007) Macroeconomic Determinants of Bank Spread in Brazil: An Empirical Evaluation. Universidad Federal do Parana Working Paper. Tan, T. (2012) Determinants of Credit Growth and Interest Margins in the Philippines and Asia. IMF Working Paper, 123.
• University of Washington Web Site (2003) Measuring the Determinants of Average and Marginal Bank Interest Rate Spreads in Chile, 1994-2001. [online] Available at: http://www.econ.washington.edu/user/plbrock/ChileSpreads091603.pdf [Accessed: 01 Oct 2012].
• Verbeek, M. (2012) A Guide to Modern Econometrics. 4th ed. John Wiley & Sons.
• Williams, B. (2007) Factors Determining NIMs in Australia: Domestic and Foreign Banks. Financial Markets, Institutions and Instruments, 16 (3), p.145-165.