Investigating the Determinants of Commercial Bank Interest Rate Spreads in Lesotho:Evidence from ARDL and Non-Linear ARDL Approaches

THIS ARTICLE investigates the determinants of commercial bank interest rate spreads in Lesotho using monthly time series data from January 2009 to December 2018. The Autoregressive Distributed Lag (ARDL) bounds testing approach is used to measure long-run cointegration while the non-linear ARDL (NARDL) model is used to test validity of long-run symmetric effects. The bounds tests revealed existence of long-run cointegration between the study variables. Inflation and the Treasury bill rate have a positive and statistically significant impact on interest margins while the deposit rate has a negative and significant effect.

The pass-through of inflation and the deposit rate to interest margins is less than one, respectively. This confirms that inflation affects banks’ lending rates with a second round effect while deposit liabilities are not the only source of credit financing for banks. The null hypothesis of long-run symmetry is rejected for Treasury bill rates. Authorities are advised to ensure price and general macroeconomic stability while also pursuing policies aimed at maximising savings. Keywords: Interest rate spreads, Banks, Cointegration, Lesotho JEL classification: G2; G21