© 1999 International Bank for Reconstruction and Development / The World Bank
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Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence
Ash Demirgüç-Kunt is with the Development Research Group at the World Bank, and Harry Huizinga is with the Department of Economics, Tilburg University, and the Centre for Economic Policy Research in London. The authors gratefully acknowledge comments by three anonymous referees. They also thank Anqing Shi for excellent research assistance and Paulina Sintim-Aboagye for help with the manuscript.
Using bank-level data for 80 countries in the years 1988–95, this article shows that differences in interest margins and bank profitability reflect a variety of determinants: bank characteristics, macroeconomic conditions, explicit and implicit bank taxation, deposit insurance regulation, overall financial structure, and underlying legal and institutional indicators. A larger ratio of bank assets to gross domestic product and a lower market concentration ratio lead to lower margins and profits, controlling for differences in bank activity, leverage, and the macroeconomic environment. Foreign banks have higher margins and profits than domestic banks in developing countries, while the opposite holds in industrial countries. Also, there is evidence that the corporate tax burden is fully passed onto bank customers, while higher reserve requirements are not, especially in developing countries.
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