Empirical Investigation of the Determinants of Bank Interest Rate Spread in Nigeria

Bank interest rate spreads in Nigeria are among the widest in sub-Saharan Africa, and their determinants have significant implications for the cost of financial intermediation, private sector credit access, and monetary policy effectiveness. This study empirically investigates the determinants of bank interest rate spreads in Nigerian deposit money banks for the period 2008 to 2022. Bank interest rate spread was defined as the difference between the average prime lending rate and the average savings deposit rate. Potential determinants examined include bank-specific factors (operating costs, non-performing loan ratio, bank size, and profitability), market structure factors (concentration ratio and Lerner index), and macroeconomic factors (inflation rate, monetary policy rate, and government securities yield). Panel data regression with the fixed effects estimator was employed using bank-level data from twelve deposit money banks. Results showed that operating cost ratio (coefficient = 0.43, p < 0.01), non-performing loan ratio (coefficient = 0.27, p < 0.05), and government securities yield (coefficient = 0.31, p < 0.01) were the strongest positive determinants of interest rate spreads. Bank size had a significant negative effect (coefficient = -0.18, p < 0.05). Market concentration was positively associated with wider spreads but was not significant at the 5% level. The study concludes that reducing operating costs, improving loan quality, and limiting banks' crowding-out investment in risk-free government securities are the most effective strategies for narrowing interest rate spreads in Nigeria. Keywords: interest rate spread, bank-specific determinants, macroeconomic factors, deposit money banks, Nigeria