Determinants of Net Interest margins in Zambia(1998-2011)

Net interest margins (NIM) have been an interesting issue and of great debate. In Zambia, NIM has generally been high thus, having low savings rate and high lending rates. This is not good for the economy because on one hand, it discourages savings thereby, reducing the levels of monies available for lending. On the other hand, it discourages investment in the economy because of high lending rates and hence impacts negatively on economic growth of the country. Therefore, this study investigates the determinants of NIM in Zambia using bank specific factors; credit risk, insolvency risk and equity. It is a purely microeconomic study. Secondary bank data was used in this study and it used a panel regression analysis using the autoregressive distributive lag (ARDL) model of Pesaran, Shin and Smith (1999) to a panel of 11 selected commercial banks in Zambia. It covers the period 1998 - 2011. The unit root test results showed that equity and insolvency risk were stationary in levels while net interest margins and credit risk were stationary after the first difference. This led to the use of the ARDL regression model. Credit risk was the only variable found to be significant in the short run and it was found to have a negative effect on net interest margins. However, in the long run, all variables were found to be highly significant and positively related to net interest margins.