2012-06: Profitability determinants of deposit institutions in small, underdeveloped financial systems: the case of Fiji (Working paper)
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Author(s)
Sharma, Parmendra
Gounder, Neelesh
Year published
2012
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This paper investigates the profitability determinants of deposit-taking institutions in Fiji, a representative South Pacific economy, over the 2000-2010 period. The study uses panel data techniques of fixed effects estimation and generalized method of moments (GMM) to purge time-invariant unobserved firm-specific effects and to mitigate potential endogeneity problems. Market power (measured by the Lerner Index) is a key determinant of profitability, which, inter alia, allows institutions to pass on to their clients the interest costs of raising deposit liabilities and the overall cost of operations; the association of both ...
View more >This paper investigates the profitability determinants of deposit-taking institutions in Fiji, a representative South Pacific economy, over the 2000-2010 period. The study uses panel data techniques of fixed effects estimation and generalized method of moments (GMM) to purge time-invariant unobserved firm-specific effects and to mitigate potential endogeneity problems. Market power (measured by the Lerner Index) is a key determinant of profitability, which, inter alia, allows institutions to pass on to their clients the interest costs of raising deposit liabilities and the overall cost of operations; the association of both with profitability is positive and highly significant. Moreover, raising deposit liabilities and granting loan beyond a certain point may not be profitable for institutions. Policy implications are considerable, especially for the small, fragile, growth-challenged South Pacific island economies.
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View more >This paper investigates the profitability determinants of deposit-taking institutions in Fiji, a representative South Pacific economy, over the 2000-2010 period. The study uses panel data techniques of fixed effects estimation and generalized method of moments (GMM) to purge time-invariant unobserved firm-specific effects and to mitigate potential endogeneity problems. Market power (measured by the Lerner Index) is a key determinant of profitability, which, inter alia, allows institutions to pass on to their clients the interest costs of raising deposit liabilities and the overall cost of operations; the association of both with profitability is positive and highly significant. Moreover, raising deposit liabilities and granting loan beyond a certain point may not be profitable for institutions. Policy implications are considerable, especially for the small, fragile, growth-challenged South Pacific island economies.
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Copyright © 2010 by author(s). No part of this paper may be reproduced in any form, or stored in a retrieval system, without prior permission of the author(s).
Note
Finance
Subject
G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
C23 - Single Equation Models; Single Variables: Models with Panel Data; Longitudinal Data; Spatial Time Series
deposit institutions
profitability determinants
Fiji
South Pacific
GMM