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Determinants of Interest Spread in Pakistan

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Author Info

  • Idrees Khawaja

    (Pakistan Institute of Development Economics, Islamabad.)

  • Musleh-ud Din

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

Interest spread of the 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 on the effectiveness of bank lending channel 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 inelasticity of deposit supply is a major determinant of interest spread whereas industry concentration has no significant influence on interest spread. One reason for inelasticity of deposits supply to the banks is the absence of alternate options for the savers. The on-going merger wave in the banking industry will further limit the options for the savers. Given the adverse implications of banking mergers for a competitive environment, we argue that to maintain a reasonably competitive environment, merger proposals may be subjected to review by an antitrust authority with the central bank retaining the veto over merger approval.

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File URL: http://www.pide.org.pk/pdf/Working%20Paper/Working%20Paper-22.pdf
File Function: First Version, 2007
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Bibliographic Info

Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2007:22.

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Length: 18 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:pid:wpaper:2007:22

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Keywords: Banks; Determination of Interest Rates; Mergers; Acquisitions;

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References

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  1. David Neumark & Steven A. Sharpe, 1989. "Market structure and the nature of price rigidity: evidence from the market for consumer deposits," Finance and Economics Discussion Series 52, Board of Governors of the Federal Reserve System (U.S.).
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  17. Haber, Stephen, 2004. "Comment on "How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America" by Maria Soledad Martinez Peria and Ashoka Mody," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 539-42, June.
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Citations

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Cited by:
  1. Tatum Blaise Pua Tan, 2012. "Determinants of Credit Growth and Interest Margins in the Philippines and Asia," IMF Working Papers 12/123, International Monetary Fund.
  2. Hossain, Monzur, 2012. "Financial reforms and persistently high bank interest spreads in Bangladesh: Pitfalls in institutional development?," Journal of Asian Economics, Elsevier, vol. 23(4), pages 395-408.
  3. Khan, Mehwish Aziz & Kayani, Ferheen & Javid, Attiya Yasmin, 2011. "Effect of Mergers and Acquisitions on Market Concentration and Interest Spread," MPRA Paper 37311, University Library of Munich, Germany.
  4. Imran, Kashif & Nishat, Mohammed, 2013. "Determinants of bank credit in Pakistan: A supply side approach," Economic Modelling, Elsevier, vol. 35(C), pages 384-390.
  5. Sheikh Khurram Fazal & Muhammad Abdus Salam, 2013. "Interest Rate Pass-Through: Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 39-62, Jan-June.

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