BANK EFFICIENCY, OWNERSHIP AND MARKET STRUCTUREWHY ARE INTEREST SPREADS SO HIGH IN UGANDA?

Using a unique bank-level dataset on the Ugandan banking system over theperiod 1999 to 2005, we explore the factors behind consistently high interest rate spreadsand margins. While foreign banks charge lower interest rate spreads, we do not find arobust and economically significant relationship between privatization, foreign bankentry, market structure and banking efficiency. Similarly, macroeconomic variables canexplain little of the over-time variation in bank spreads. Bank-level characteristics, onthe other hand, such as bank size, operating costs, and composition of loan portfolio,explain a large proportion of cross-bank, cross-time variation in spreads and margins.However, time-invariant bank-level fixed effects explain the largest part of bankvariationin spreads and margins. Further, we find tentative evidence that banks targetingthe low-end of the market incur higher costs and therefore higher margins....