Efficiency in Financial Intermediation: Theory and Empirical Measurement

Abstract

There is a large variation in financial intermediary development across countries: Private Credit to GDP was 173 per cent in the United States in 2003, but only 2 per cent in Mozambique. 1 This variation is critical to countries’ socio-economic performance: countries with higher levels of credit to the private sector as a share of GDP experience higher GDP per capita growth and faster rates of reduction in the headcount, that is, the share of population living on less than a dollar a day (Beck, Levine and Loayza, 2000; Beck, Demirguc-Kunt and Levine, 2007). However, economists and policy-makers are not just interested in the amount of society’s savings that is channelled by intermediaries to the most deserving borrowers, but also in the efficiency with which this happens. The interest spread — the difference between lending rate and deposit rate — has been one of the most prominent measures of efficiency. While interest rate spreads vary typically between 2 and 4 per cent in developed financial systems, they often reach 10 per cent and more in developing countries and are over 30 per cent in Brazil (Laeven and Majnoni, 2005). These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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