1. DERERIMENANTS OF INTEREST RATE SPREAD:
A CASE OF PAKISTANI BANKING SECTOR
By
AKMAL SHAHZAD BUTT
Reg #10759
MS – FINANCE
DEPARTMENT OF MANAGEMENT SCIENCES
IQRA UNIVERSITY ISLAMABAD
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2. Outline
Introduction
Problem Identification
Objective of Study
Contribution of Study
Literature Review
Model Specification
Methodology
Data
Result & Discussion
Conclusion
Limitation
Future Implication
References
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3. INTRODUCTION
Financial Institution:
Provide Finance to other Sectors to perform economic activity. Channelize
the fund from surplus to deficit area.
Role of FI in Economy
High cost of finance create hurdle in economic activity which slow down the
economic development
FI consists of banking and non banking institutions
Banks, as FIs, are the primary unit of the financial system which is an active
player of economic development
Bank differ with each other by Assets, No of employees, technology adopted,
lending policies, Risk behavior etc
On base of internal /External each bank have its own status in market
All banks react differently to macro economic factors
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4. INTRODUCTION
Interest Rate Spread:
Role of IRS in Economy:
Interest Rate Spread (IRS) and a prominent indicator of efficiency of the
banking sector. IRS, in an economy, has crucial implication for the growth
and development, as numerous authors suggest a critical link between
efficient intermediate and economic growth e.g. (Quaden, 2004)
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5. PROBLEM IDENTIFICATION
Implementation of new Technology has a critical role in banking services by
reducing risk and cost.
Extent to which the Pakistani bank has adopted the new technology and
awarance in Public
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6. OBJECTIVE OF STUDY
To explore the determinant of IRS in Pakistani Banking Sector.
To find out the sensitivity of IRS to bank specific, market
specific and macroeconomic factors in Pakistani banking
sector.
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7. CONTRIBUTION OF STUDY
This study creates the awarance in stake holders for better use
and gain the benefit of new technology
This study also highlights the determinants of IRS in Pakistani
banking sector as limited publish work is available.
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8. LITERATURE REVIEW
• Quaden (2004), declared efficient intermediation benefits the
real economy by allowing higher expected return for saver and
providing more opportunity by cheep investible fund.
• Researchers believe that bank specific variables have significant
role in determining the IRS (Gelos, 2006; Kunt and Huizinga,
1998).
• Qayyum & Khan (2006) described the merger wave in Pakistani
banking sector in term of technology adoption
• Aziz et al. (2010) discussed the factor which can reduce current
higher IRS especially macro and fiscal factor.
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9. LITERATURE REVIEW
Technology literature recognizes that technology development
has enhanced the operational efficiency of business. The use
of technology is not new in banking sector. It has significant
impact on the banking sector.
Degryse et al. (2010) argues the technology has power to shape
the bank and customer interaction. Technological change
brings the changes in market structure and organization
structure too.
Mocetti et al. (2010) claim the technology improvement enforces
decentralized banking structure. A rich literature exists on
cost efficiency role of technology in banking sector but it has
not taken as one of the determinant of IRS.
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10. LITERATURE REVIEW
Manjo (2010) included the technology development as
determinant of banking sector efficiency while studying the
old banks in kerala India. As technology development
required more fund to cope with the market. So the operational
expense increases dramatically. Such controversy can be
resolved by an unbiased quantitative analysis of the
determinant of IRS in a developing country.
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14. Hypothesis
H1: Bank Specific Factors have significant impact on
Interest Rate Spread (IRS)
H2: Macroeconomic Factors have significant impact on
Interest Rate Spread (IRS)
H3: Market Specific Factors have significant impact on
Interest Rate Spread (IRS)
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15. METHODOLOGY
Data:
This study examined the determinants of interest rate spread
in Pakistani banks for the period of 08 years from 2003 to
2010.
Population of the study comprise of Private Banks, state own
banks and foreign banks.
Banks selected on the basis of data availability of study major
variables
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16. METHODOLOGY
Procedure:
EVIEWS soft ware used for analysis.
To check stationarity ADF test applied.
Descriptive analysis was used to identify the level of macro,
Bank and market specific variables.
Correlation were checked among the variables.
Panel Regression techniques were used to measures the
relationship among the Bank, Macro and Market Specific
Variables.
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18. Variable I II III VI VII VIII IX X XI X
NW -0.002
(0.97)
IDBEA -0.03 -0.03
(0.87) (0.87)
NIBDOPA 1.05 1.02 1.02
(0.59) (0.60) (0.59)
LR -0.03 -0.03 -0.03 -0.03
(0.45) (0.45) (0.47) (0.50)
BLBSL 7.14 7.14 7.14 7.14 3.27
(0.01) (0.01) (0.01) (0.01) (0.54)
BDBSD -5.86 -5.86 -5.86 -5.86 -4.45 -4.45
(0.00) (0.00) (0.00) (0.00) (0.12) (0.14)
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19. Variable I II III VI VII VIII IX X XI X
OPCTA -5.87 -5.87 -5.87 -5.87 -13.28 -12.99 -12.99 -6.68
(0.37) (0.36) (0.35) (0.38) (0.08) (0.09) (0.08) (0.04)
SROPR -12.54 -12.54 -12.54 -12.54 -7.98 -7.98 -7.98 -0.58
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01)
TLNW -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.56
(0.017) (0.02) (0.02) (0.02) (0.00) (0.00) (0.00) (0.01)
NE 0.688 0.688 0.688 0.688 0.95 0.95 0.95 0.14
(0.02) (0.02) (0.02) (0.02) (0.00) (0.00) (0.00) (0.07)
NIITI 2.30 2.30 2.30 2.30 2.81 2.66 2.66 0.45
(0.00) (0.00) (0.00) (0.01) (0.02) (0.02) (0.02) (0.02)
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20. Variable I II III VI VII VIII IX X XI X
IFI -0.13
(0.00)
TFI -0.21
(0.00)
CR7 -85.38 -7.01
(0.00) (0.00)
MS -1.3 -2.69
(0.00) (0.04)
DBTL 6.23 6.61
(0.00) (0.02)
DGDP -2.93 -2.97
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21. Variable I II III VI VII VIII IX X XI X
ER -0.51 -0.52
(0.00) (0.01)
EGDP 0.14 0.17
(0.00) (0.00)
INF -0.18 -0.17
(0.00) (0.03)
M2GDP 0.24 0.26
(0.00) (0.00)
Constant 2.71 2.78 2.69 3.19 2.21 2.22 2.10 4.89 3.89 3.66
R2 Adjusted 0.79 0.79 0.79 0.82 0.69 0.69 0.69 0.89 0.98 0.71
F-Statistics 15.29 16.53 17.87 21.57 12.57 14.57 14.57 20.89. 271 69.43
F-Stat (Prob) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
D-Watson
2.08 2.08 2.07 2.09 1.93 1.93 1.97 Saturday, August 11, 2012
2.07 1.87 1.90
Stat
22. CONCLUSION .
Empirical result of this study reveals that spread is significantly
cause by Operating Cost, Non interest revenue, Technological
development, Concentration ratio, Market Size, Domestic
Borrowing and Fiscal deficit.
Results of our study are evident that bank with more operating
cost pass on to client by setting high interest rate on lending and
lower rate on deposit. Further more banks also protect themselves
in high uncertainty and inflationary environment by creating gap
between lending and deposit rate.
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23. CONCLUSION
As Pakistani banking sector introducing new technology in bank
operations, this required more investment and increasing cost
Hunter and Timme (1991). This cost is also passed on to the
clients
Finally, instable macroeconomic environment, high inflation,
exchange rate volatility, budgetary deficit and govt. dependency
on local bank have a significant role in higher IRS in banking
sector. Further more component of Governance such corruption,
Property right etc also behind the high IRS.
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24. RECOMENDATIONS
Both the bank and policy maker should device the strategy to
encourage adopting the new technology, reduce the uncertainty by
improving law and order situation, controlling inflation and
exchange rate. Also focus to break the existing organized cartel in
banking sector.
Fiscal deficit increase the burden on financial sector, Govt. should
reduce the deficit by decreasing the non developing expenditure
It is also important to educate the customer regarding technology
adoption.
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25. LIMITATION
First, third world countries, there is no proper record for
previous year
Second, lack of access to data bases like world economic
indicators is limited which also creates hurdles for
included variables
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26. FUTUR IMPLICATIONS
This study includes the traditional variables and added
technology as determinant of IRS.
In future, number of years and bank can be increased.
Researcher should explore the link of Terrorist wave
with IRS and Banking operations. The energy crises
impact on IRS required to investigate
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27. REFERENCES
Quaden, G. (2004). Efficiency and stability in an evolving financial system.
www.bnb.be/Sg/En/Contact/pdf/2004/sp040517en.pdf
Kunt, A. D., & Huizinga, H. (1999). Determinants of Commercial Bank Interest
Margin and Profitability: Some International Evidence. World Bank Policy Research
Working Paper No. 1900
Qayyum, A., & Khan, S. (2006). X-Efficiency, Economy of Scale, Techological
Progress and Competition of Paksitani's Banks. Paksitan Institute of Deveolpement
Economics Islamabad .
Aziz, Jabran ; Raza, Ahsan ; Rehman, Kashif; Zaheer, Babar; Raza, Mohsin (2010)
Higher / Inflated Spread: A Poison Pill for Financial Sector Measures to Turn Down
Banking Spread, Special Study for Pakistani Banking Industry . IJCRB Vol. 2 No. 4
Manoj P. K. (2010) Impact of Technology on the Efficiency and Risk Management
of Old Private Sector Banks in India: Evidence from Banks Based in Kerala.
European Journal of Social Sciences – Vol. 14, No. 2
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