mutual distrust among commercial banks coupled with regulatory and institutional shortcomings depress interbank market activity. Banks prefer to park excess liquidity at the central bank at submarket rates and far in excess of minimum reserve requirements rather than lend to each other. Moreover, despite recent reforms, government securities markets remain relatively underdeveloped in Tajikistan, compounded by the traditional practice of issuing securities at below-market rates, which until recently has made this alternative form of investment and liquidity management unattractive for banks. However, since January 2024 the government has been regularly holding auctions of short-term and long-term government securities at close to market rates, which over time should attract the interest of banks.

**Table 1: OLS-PCSE Panel Estimation Results**

|||(Dep|endent v|ariable:|Banks' N|et Intere|st Sprea|d)<sup>1/</sup>|||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|(9)|(10)|(11)|(12)|
|Operating costs|0.467***|0.487***|0.466***|0.484***|0.467***|0.489***|0.467***|0.484***|0.470***|0.494***|0.469***|0.487***|
||(0.0841)|(0.0847)|(0.0844)|(0.0834)|(0.0826)|(0.0834)|(0.0826)|(0.0814)|(0.0803)|(0.0813)|(0.0807)|(0.0795)|
|Credit risk|0.246***|0.243***|0.246***|0.243***|0.248***|0.244***|0.248***|0.246***|0.249***|0.244***|0.249***|0.246***|
||(0.0285)|(0.0283)|(0.0285)|(0.0285)|(0.0286)|(0.0284)|(0.0286)|(0.0286)|(0.0288)|(0.0286)|(0.0288)|(0.0288)|
|Opportunity cost of excess bank reserves|0.0153*|0.0153*|0.0151*|0.0153*|0.0155*|0.0155*|0.0156*|0.0158*|0.0142*|0.0140*|0.0142*|0.0143*|
||(0.00831)|(0.00830)|(0.00831)|(0.00827)|(0.00826)|(0.00826)|(0.00825)|(0.00821)|(0.00827)|(0.00829)|(0.00827)|(0.00823)|
|Size of operations|-0.811***|-0.948***|-0.820***|-0.879***|-0.784***|-0.923***|-0.779***|-0.829***|-0.781***|-0.942***|-0.786***|-0.845***|
||(0.110)|(0.125)|(0.112)|(0.124)|(0.107)|(0.122)|(0.107)|(0.118)|(0.105)|(0.122)|(0.106)|(0.119)|
|Risk aversion|0.00148***|0.00146***|0.00148***|0.00148***|0.00148***|0.00146***|0.00148***|0.00148***|0.00146***|0.00144***|0.00146***|0.00145***|
||(0.000140)|(0.000140)|(0.000140)|(0.000139)|(0.000140)|(0.000140)|(0.000140)|(0.000139)|(0.000140)|(0.000142)|(0.000141)|(0.000140)|
|Income diversification|-0.0692***|-0.0722***|-0.0694***|-0.0716***|-0.0691***|-0.0723***|-0.0688***|-0.0708***|-0.0687***|-0.0726***|-0.0687***|-0.0710***|
||(0.00591)|(0.00622)|(0.00591)|(0.00615)|(0.00584)|(0.00618)|(0.00581)|(0.00606)|(0.00576)|(0.00615)|(0.00575)|(0.00602)|
|Market power|2.825***|2.971***|2.839***|2.847***|2.855***|3.009***|2.857***|2.860***|2.838***|3.020***|2.854***|2.861***|
||(0.325)|(0.328)|(0.325)|(0.326)|(0.322)|(0.326)|(0.321)|(0.321)|(0.321)|(0.327)|(0.320)|(0.322)|
|Interest rate risk|||||0.117***|0.119***|0.117***|0.118***|0.0873*|0.0871*|0.0877*|0.0853*|
||||||(0.0435)|(0.0439)|(0.0433)|(0.0426)|(0.0452)|(0.0457)|(0.0453)|(0.0448)|
|Inflation|||||0.00729|-0.00375|0.00620|0.000399|0.0547|0.0476|0.0544|0.0533|
||||||(0.185)|(0.183)|(0.185)|(0.185)|(0.187)|(0.185)|(0.187)|(0.187)|
|Legal environment|||||||||-5.076**|-5.627**|-5.063**|-5.384**|
||||||||||(2.493)|(2.539)|(2.500)|(2.485)|
|State-owned bank dummy||1.288**||||1.274**||||1.354**|||
|||(0.586)||||(0.567)||||(0.556)|||
|Domestic (private) bank dummy|||-0.0595||||-0.0968||||-0.123||
||||(0.358)||||(0.339)||||(0.329)||
|Foreign bank dummy||||-0.735*||||-0.640||||-0.659*|
|||||(0.414)||||(0.394)||||(0.388)|
|Constant|9.254***|9.755***|9.336***|9.898***|7.866***|8.369***|7.872***|8.331***|2.673|2.724|2.768|2.960|
||(0.751)|(0.806)|(0.760)|(0.917)|(0.830)|(0.880)|(0.831)|(0.956)|(2.548)|(2.580)|(2.559)|(2.539)|
|Observations|748|748|748|748|748|748|748|748|748|748|748|748|
|R-squared|0.600|0.604|0.601|0.601|0.603|0.607|0.603|0.603|0.604|0.609|0.604|0.605|
|N|19|19|19|19|19|19|19|19|19|19|19|19|

1/ Standard errors in parentheses; * p<0.1; ** p<0.05; *** p<0.01 Source: Author’s calculations.

The coefficient for the size of operations (log of net loans) is negative and significant, implying that larger banks that manage higher volumes of loans can afford to offer more competitive interest rates. While this finding may _prima facie_ be at odds with the hypothesis that large banks may exercise their market power and exhibit larger spreads (see below), in Tajikistan, economies of scale and better risk diversification brought about by a larger size of operations could lead to lower spreads, other things being equal. This highlights that there is room for further consolidating the banking system. The Tajik 15