Macroeconomic, sector specific and bank specific determinants of net interest rate margin: what matters more for an emerging market economy?

The period after 2001 in Turkey is marked with high economic growth, better macroeconomic conditions, and a strengthening financial sector. Turkish banks have shown remarkable performance in this period and ironically increased their profits even during the recent global financial crisis. In this paper, we analyze the determinants of net interest margin as a proxy for the cost of financial intermediation. The paper covers commercial banks for the period from the last quarter of 2001 to the first quarter of 2009. The fixed-effect panel data regressions show that inflation, interbank interest rates, and real growth among the macroeconomic variables; sector concentration among the banking sector variables; risk aversion and implicit interest payments among the bank-specific variables are significant in explaining the net interest margin. Recovery and stabilization period and global crisis dummies are significant as well. The results indicate the precedence of the general macroeconomic conditions and the market structure of the sector over the bank-specific variables. Our results also reveal the importance of deterioration in risk perceptions in increasing the net interest rate margin during the global financial crisis.