Determinantsofbanknetinterest.PDF

Griffith Research Online .au Determinants of bank net interest margins in Fiji, a small island developing state Author Gounder, Neelesh, Sharma, Parmendra Published 2012 Journal Title Applied Financial Economics DOI /10.10802012.674202 Copyright Statement Copyright 2012 Taylor Francis. This is an electronic version of an article published in Applied Financial Economics, Volume 22, Issue 19, 2012, Pages 1647-1654. Applied Financial Economics is available online at: with the open URL of your article. Downloaded from /10072/47245 Determinants of bank net interest margins in Fiji, a Small Island Developing State Abstract This paper investigates the determinants of net interest margins (NIM) of banks in Fiji, a small island developing state in the South Pacific, over the 2000–2010 period. Based mainly on the Ho and Saunders (1981) dealership model and extensions thereto, this study uses a number of panel data estimation techniques to control for possible heterogeneity across banks and various assumptions about errors. Consistent with the theoretical model, NIM has a positive association with implicit interest payment, operating cost, market power and credit risk, and a negative association with the quality of management and liquidity risk. However, the association with bank capital and opportunity cost of required reserves do not conform to expectations. Policy implications are discussed. Keywords: Fiji, South Pacific, bank, net interest margin JEL Classifications: C23, G21 I. Introduction Banks deposit mobilisation and credit allocation functions have important implications for economic growth and development (Levine, 1997, 2005). The significance of this intermediation process is likely