Interest spread of Pakistan’s banking industry has been on the rise for the last two years. The increase in interest spread discourages savings and investments, on the one hand, and raises concerns about the effectiveness of the bank-lending channels of monetary policy, on the other. This study examines the determinants of interest spread in Pakistan using panel data of 29 banks. The results show that the share of interest-insensitive deposits in total bank deposits is a key determinant of interest spread, whereas industry concentration has no significant impact on interest spread. Furthermore, the ongoing merger wave in the banking industry will limit the options for the savers, with adverse implications for the interest spread. We argue that to maintain a reasonably competitive environment, merger proposals may be subjected to review by an anti-trust authority.
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Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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