Factors Influencing Interest Rate Spread among Commercial Banks in Namibia.

Machakaire, Admire Kokerai (2023) Factors Influencing Interest Rate Spread among Commercial Banks in Namibia. Masters thesis, The Open University of Tanzania.

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Abstract

The banking sector has played a significant role in driving the Namibian economy over the past decade. The interest rate spread, which is the difference between the rate banks pay to borrow funds and the rate they charge borrowers, is a critical indicator of banks’ financial performance efficiency. This study aims to examine the factors that influence the interest rate spread in Namibian commercial banks. To achieve the study’s objective, a multiple regression analysis was conducted using data obtained from all commercial banks operating in Namibia between 2005 and 2015. The study examined the relationships between the interest rate spread data and macroeconomic environment, banking industry-specific factors, and bank-specific factors that determine interest rate spread. The results show that the factors influencing interest rate spread accounted for 45% of the changes in the interest rate spread. Bank-specific factors, such as capital adequacy ratio, liquidity, and asset quality, accounted for the highest proportion, scoring 40%. In contrast, macroeconomic environment factors scored 0.17%. The study found that inflation and real gross domestic product, both macroeconomic environment factors, had a negative effect on interest rate spread. Furthermore, banking industry-specific factors, such as the Herfindahl–Hirschman Index (HHI) and the number of banks, had mixed results. HHI had a positive effect on interest rate spread, while the number of banks had a negative effect. In conclusion, bank-specific factors were found to be the most significant influencers of interest rate spread among commercial banks in Namibia, accounting for 40% of the changes in interest rate spread out of the 45% contribution made by the independent variables studied. Macroeconomic environment factors had the least influence, contributing 0.17%. The findings of this study provide insights into the factors that affect the interest rate spread in Namibian commercial banks. Keywords: Interest Rate, Interest Rate Spread, Commercial Banks, Namibia

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