Question

What are the main factors that affect banks' net interest margin ?
Why financial liberalization may not necessarily result in narrowing banks' net interest margins ?

Answer 1

NIM : Net interest margin (NIM) is a measurement comparing the net interest income a financial firm generates from credit products like loans and mortgages, with the outgoing interest it pays holders of savings accounts and certificates of deposit (CDs).

Multiple factors may affect a financial institution's net interest margin - chief among them : supply and demand. If there's a large demand for savings accounts compared to loans, net interest margin decreases, as the bank is required to pay out more interest than it receives. Conversely, if there's a higher demand in loans versus savings accounts, where more consumers are borrowing than saving, a bank's net interest margin increases.

B.  Net Interest Margins. The business of bank is to accept deposits and lend advances. Hence, it is very important to know the spread between them in order to judge a bank's profitability and growth. Net interest Margins is the spread of the interest earned and the in expended by the bank.

The aim of domestic financial liberalisation and
deregulation is to improve economic performance through increased competitive efficiency within financial markets, thereby indirectly benefiting non-financial sectors of the economy through three major channels: firstly, the removal of regulations and price distortions should permit savings to be directed into highest-yielding (risk-adjusted) forms of investment (improved allocative Efficiency); secondly, increased competition should reduce the costs of financial intermediation (higher operational efficiency): and thirdly, the reform measures should generate an improved range of financial products and services adaptable to changing consumer needs (dynamic efficiency).