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What Drives Interest Rate Spreads of Commercial Banks in Pakistan? Empirical Evidence based on Panel Data

Author

Listed:
  • Mahmood ul Hasan Khan

    () (State Bank of Pakistan)

  • Bilal Khan

    (State Bank of Pakistan)

Abstract

This study analyses the determinants of interest rate spreads of commercial banks operating in Pakistan by using a balanced panel of 28 banks from 1997 to 2009. A one step linear regression with fixed effect across banks is estimated to take into account the impact of bank-specific, industry-specific, and macroeconomic factors on banking spreads. The results indicate that spreads of commercial banks are primarily driven by the banks’ low cost of funding; operating expenses; and opportunities to earn income from non-core business activities. Specifically, the share of non-remunerative deposits in total deposits and administration expense in total expense are positively correlated with banking spreads, while the share of non-interest income in total income negatively affects banking spreads. Further, market concentration and macroeconomic variables, such as real GDP and interest rates also have a positive influence on commercial bank spreads in Pakistan. We also analyze the impact of the recent imposition of a regulatory floor on savings deposit returns on banking spreads. Using a difference-in-difference approach we find that in the absence of subsequent tightening in monetary policy, banking spreads would have been lower as a result of the policy measure.

Suggested Citation

  • Mahmood ul Hasan Khan & Bilal Khan, 2010. "What Drives Interest Rate Spreads of Commercial Banks in Pakistan? Empirical Evidence based on Panel Data," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 6, pages 15-36.
  • Handle: RePEc:sbp:journl:47
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    File URL: http://www.sbp.org.pk/research/bulletin/2010/Vol6No.2/Mahmood&Bilal.pdf
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    Citations

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    Cited by:

    1. Adnan Haider & Asad Jan & Kalim Hyder, 2013. "On the (Ir)Relevance of Monetary Aggregate Targeting in Pakistan: An Eclectic View," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 65-119, July-Dec.
    2. Shah Hussein & Amna Saeed & Amer Hassan, 2011. "The Financial Accelerator: An Emerging Market Story," Working Papers id:4551, eSocialSciences.
    3. Shah Hussain & Amna Saeed & Amer Hassan, 2011. "The Financial Accelerator: An Emerging Market Story," SBP Working Paper Series 41, State Bank of Pakistan, Research Department.

    More about this item

    Keywords

    interest rate spread; panel data; competition;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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