Banking Sector Reform and Interest Rates in Transition Economies: Bank-Level Evidence from Kyrgyzstan

Martin Brown, Maria Rueda Maurer, Tamara Pak and Nurlanbek Tynaev

Issue
2007-07

Pages
34

JEL classification
G21, O16, P34

Keywords
Transition, Financial Sector Development, Interest Rates

Year
2007

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.