Determinants of bank net interest margins in Fiji, a small island developing state

Abstract

This article investigates the determinants of Net Interest Margins (NIM) of banks in Fiji, a Small Island Developing State (SIDS) in the South Pacific, over the period 2000-2010. Based mainly on the Ho and Saunders' (1981) dealership model and extensions thereto, this study uses a number of panel data estimation techniques to control for possible heterogeneity across banks and various assumptions about errors. Consistent with the theoretical model, NIM has a positive association with implicit interest payment, operating cost, market power and credit risk, and a negative association with the quality of management and liquidity risk. However, the association with bank capital and opportunity cost of required reserves do not conform to expectations. Policy implications are discussed.