Determinants of bank interest rate spreads in Botswana commercial banking sector

Abstract

Using annualized pooled data fo r the period 1996 - 2006, this study examines determinants o f interest rate spreads in the commercial hanks in Botswana. The study finds that intermediation costs, herfindahl index, inflation and exchange rate depreciation are the main drivers o f interest rate spreads while liquidity, equity and overhead costs proved to be statistical insignificant. The study concludes that interest rate spreads is taking an upward trend instead o f converging to international standards by narrowing. The study further recognizes the important role exchange rate plays in determining spreads and its role in attracting foreign direct investment and hence the need fo r proper and efficient management o f exchange rate policy. On the policy level, more emphasis is placed on the policy implementation as compared to formulation. This is because there are many policies and initiatives developed to improve efficiency in the financial sector but lacks on the implementation part.