Demiguc-kunt and Huizinga (1999) had stated that, financial intermediation has a critical and significant effect which can have an impact on net returns to savings, and the gross return for investments. It was also indicated that the spread between the two returns reflects interest margin of banks, in addition to cost of transaction and taxes faced directly by investors and savers. Finally, it was concluded that bank interest margin, can be interpreted as an indicator of bank performance.

1.2 AIMS AND CONTRIBUTION

The primary aim of this study is to investigate empirically the main determinants that affect bank profitability and interest margin for commercial banks in the U.K between 2002 to 2008.

The banking system in the U.K has been witness to a substantial growth and a change in recent years and its total assets have rapidly expanded since 1990.The sector consists of both domestic and foreign banks. The assets of U.K owned banks represent a 48% of the total assets of the U.K banking sector and have increased by 5% since 1990.The major trends in the U.K banking sector over the last years include the conversion of building societies into banks, the consolidation of U.K banking industry and the entrance of non-financial firms into the financial service market. Following the building societies act 1986 a number of building societies have converted themselves into banks themselves into banks especially between 1994 to 1997 .In addition an increase in commercial freedom was experienced by building societies act 1997.These changes enhance the scope of increase in competition and also benefited the consumer with more choices.

According to Mc cauley and White (1997) and White (1998), the U.K had an increase in merger and acquisition in its banking sector (in values terms) between 1991 to 1997 than any other European country. Finally a while back, new players such as supermarkets, insurance companies and football clubs were given a