Floerkemeier 2007; and Horvath 2009) find a negative association between capitalization and net interest margins, suggesting that less capitalized banks have to take on more risks (translating into higher margins) to receive higher returns and internally boost their reserves.

Studies have also explored the potential impact of bank ownership on net interest margins. Micco, Panizza and Yanez (2007) and Fungáčová and Poghosyan (2011) find that the form of bank ownership has a strong impact on bank margins in developing economies. Martinez and Mody (2004) find that in Latin America foreign banks can charge lower spreads relative to local banks, while the opposite conclusion is obtained by Schwaiger and Liebig (2008) for a sample of Central and Eastern Europe economies. Ben Nassar, Martinez and Pineda (2014) find that in Honduras, foreign banks are pressured to consolidate and reduce operating costs to offer competitive interest margins. No effect of foreign ownership is found by Dabla-Norris and Floerkemeier (2007) in Armenia, and by Beck and Hesse (2009) in Uganda.

Few papers examine the role of macroeconomic conditions and the regulatory framework in explaining banks’ intermediation spreads. For example, Demirgüç-Kunt, Laeven and Levine (2004) and Claeys and Van der Vennet (2008) find a positive relationship between inflation and bank margins, while Brock and Rojas Suarez (2000), Saunders and Schumacher (2000) and Gelos (2006) show that higher reserve requirements are associated with higher spreads. Others (for example, Demirgüç-Kunt, Laeven and Levine 2004, Gelos, 2006, and Poghosyan, 2012) control for the quality of the institutional and legal setup and find that in general, less supportive environments are associated with higher spreads.

The literature on the determinants of banks’ net interest spreads in the Caucasus and Central Asia is scant. Since banks are the major source of financing in this region, the level of net interest margins and spreads is an important policy variable. Dabla-Norris and Floerkemeier (2007) examine the determinants of interest rate spreads in Armenia during 2002–2006 and find that spreads are mostly explained by bank-specific factors such as bank size, liquidity, and market power. Teodoru (2020) studies the drivers of bank spreads in the Kyrgyz Republic and finds that low levels of competition, credit risk, interest rate risk and the legal environment are the key explanatory variables. Finally, in a cross-country setting, Almarzoqi and Ben Naceur (2015) analyze the determinants of intermediation spreads in the countries of the Caucasus and Central Asia over the period 1998–2013 and find that operational efficiency is by far the main driver of intermediation spreads. When the analysis is performed on only a small sample of Tajik banks, operational costs remain the key determinant, followed by risk aversion and income diversification.

This paper investigates the factors associated with high interest spreads in Tajikistan’s banking sector during 2011Q1– 2022Q4. It makes several contributions to the literature on interest spreads and margins. First, it contributes to a limited literature on financial development in Tajikistan. Second, it uses a unique panel dataset comprising balance-sheet and income statement quarterly data of Tajikistan’s commercial banks provided by the National Bank of Tajikistan (NBT), the country’s central bank and banking supervisor. Third, as in Ben Nassar, Martinez and Pineda (2014), it uses Beck and Katz’s (1995) OLS-based panel corrected standard errors (PCSE) procedure, which is more appropriate than alternatives (e.g., feasible generalized least squares) given the structure of the panel dataset.

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