Abstract

Recent researches in Sub-Saharan Africa have indicated that interest rate spreads have remained high and are even increasing in most countries in spite of financial liberalization. This study, using alternative definitions of interest rate spread and time series dataset, empirically investigated the factors that influence the level of interest rate spread in Nigeria by means of regression analysis. The analysis showed that two determinants: bank-specific operating expenses and the industry-specific need for consistent growth of shareholders’ net worth explain the high spread in interest rates. Another finding is ISw3 (a definition of interest rate spread which includes fees and commissions) best represents intermediation cost. The findings suggest that the banking industry is not efficient or competitive, and as long as the banks can make profits without being efficient, the observed disconnection between the growth of the financial sector and that of real sector will undermine long term growth of the economy. It is, therefore, recommended that alternative sources of financial intermediation of non-bank type including capital market should be developed to support the real sector.