Fazurin Jamaludin, Vladimir Klyuev, and Anuk Serechetapongse
INTERNATIONAL MONETARY FUND
Growth has been sluggish in Pacific island countries (PICs). High cost of credit is likely
one of the reasons. While the small scale, geographic dispersion, and vulnerability to
shocks increase the cost and risk of credit in this country group, there is considerable
variability in interest rate spreads both across countries and over time. This paper
examines the determinants of lending rates and interest rate spreads in a panel of six PICs,
extending the literature that was largely descriptive in nature or focused on a single
country. Our results are in line with economic theory. We find that the size of the
economy is negatively correlated with spreads, confirming the importance of scale.
Inflation appears to have only marginal impact on spreads. High loan loss provisions and
nonperforming loans increase the cost of credit. So does banking system concentration.
Higher institutional quality is associated with lower spreads.