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Calixte Ahokpossi is an economist in the African Department of the IMF and is grateful for comments received during an African Department seminar as well as additional comments received from Doris Ross, Mauro Mecagni and Cheikh Anta Gueye.
Net interest margin is defined here as total interest income minus total interest expense divided by average interest-earning assets.
In addition, other types of banks have different constraints and different determinants of interest margins.
We have also used alternative measures of credit risk: the ratios “impaired loans/equity” and “net charge-off.” The results obtained are similar, but the sample size is considerably reduced on account of missing data for the alternative variables (see the robustness checks section).
For a robustness check, these variables were also computed from total deposits and total loans, but the estimation results were similar.
We also experimented with another dummy variable foreign that represents banks at least 25 percent owned by foreign entities, but the results were similar.
We also experimented with another dummy variable public that represents banks at least 25 percent owned by the government, but the results were similar.
Some recent evidence indicates that interest margins may actually be lower in more concentrated markets. Cetorelli and Gambera (2001) explain that when an industrial sector is in need of external financing, banks in a concentrated market facilitate access to credit for young firms. In a concentrated market, banks can establish special relationships with young firms and take the risk of providing them with cheap loans (therefore getting lower margins), with the expectation of being rewarded with a long-term relationship when the firms succeed. In a more competitive market (less concentrated), successful startups are more likely to switch banks once they are mature, and banks will be unable to reap the full benefit of the risk they took initially.