Banking Sector Reform and Interest Rates in Transition Economies: Bank-Level Evidence from Kyrgyzstan
Martin Brown, Maria Rueda Maurer, Tamara Pak and Nurlanbek Tynaev
G21, O16, P34
Transition, Financial Sector Development, Interest Rates
We examine the impact of banking sector reforms on interest rates using bank-level data from Kyrgyzstan for 1998-2005. We find that increased confidence in the banking sector has contributed significantly to lowering interest rate levels, while the impact of lower intermediation costs, credit risk, and capital costs are negligible. Our results further suggest that the liberalization of the Kyrgyz financial sector has reduced both deposit and lending rates. Finally, we find that despite considerable restructuring, the Kyrgyz banking sector has not become more competitive. As a consequence, banks' interest rates have not fully responded to lower market rates following macroeconomic stabilization.