Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Number 1Financial Stability Reportpresumably contributing to the decrease in excessive risk-taking on banks’ side; while theopposite is true on the borrowers’ side. For example, higher lending rates may induceborrowers to undertake riskier projects. It may also have detrimental effects in the demandfor credit where high interest rates, coupled with high collateral requirements, are reflectedin making fewer projects qualify for bank loans. Hence, many profitable ventures may notbe undertaken. To some extent, this is in line with the findings in the previous study whereresults from BEEPS show that Kosovo is ranked low in terms of access to finance comparedto countries in the region.The Central Bank of the Republic ofKosovo (CBK), starting from June2004, publishes effective deposit andlending interest rates charged bycommercial banks in Kosovo. Figure70 shows the weighted average oflending and deposit rates (12-monthmoving average) for the period 2005–2009.Figure 70. Interest rates in the banking sector,2006-200916.015.014.013.012.011.010.09.08.0mar jun sep dec mar jun sep dec mar jun sep dec mar jun sep decOn average for 2004-2009 the lending2006 2007 2008 2009rates stood at 14.75% while theInterest rate on loansInterest rate spreadInterest rate on deposits (right axis)deposit rates at around 3.49%,Source: CBK (2010)making up the spread of 11.26percentage points (pp). 13 The interest rates, as appear on the statistics, are ex antemeasures of the intermediation spread. These, for example, are contractual rates chargedon loans and paid in deposits, and they intend to measure market conditions at one point intime. How much interest is paid after the contract is not reflected in the data, e.g., badloans do not pay interest rate. Therefore it is important to compute and decompose the expostlending rate, which reflects the true value of intermediation cost and enables thebreakdown of factors that compose the intermediation cost, including overheadexpenditures, regulatory costs, risk costs, etc.One approach for decomposing intermediation costs is the method used by Hansen andRocha (1986) using income statement data expressed in terms of ratios to total assets. Thismethod is utilized for countries in the region Albania, Croatia, Macedonia and Serbia. InTable 15 the decomposition of the accounting data is presented and items 1 and 2 representinterest received from earning assets and interest paid on interest bearing liabilitiesdivided by total assets. The difference between the two represents interest margin. Otherincome net represents net non-interest income such as income/expenditures from fees andcommissions, income/expenditures in dealing securities, foreign exchange, etc., excludingoperating costs and provisions. The sum of interest margin and other income gives thegross margin of banks in their operations. By subtracting operational costs (item 6) such asstaff costs, administrative costs, fixed asset costs and similar, from the gross margin the netmargin is obtained (item 7). Subtracting provisions (item 8) from the net margin we end upwith profitability indicators of the banking sector in respective countries.5.04.54.03.53.02.52.01.51.00.50.013 Until 2008, administrative expenditure paid by the client were not included in the loan interest rate. This administrative cost was 1.5 pp of total interest ratecharged for the loan. However, since 2008, in compliance with international statistical standards, administrative costs are included as part of the loan interestrate. If these expenditures were included prior to 2008, interest rates would be much higher for that period and also the decline would be sharper in the recentyears.76 |