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Do Ownership Structure and Market Power Matter in Interest Rate Pass-through? Evidence from Pakistan’s Bank Level Data

Author

Listed:
  • Syed Zulqernain Hussain

    (State Bank of Pakistan)

  • Mahmood ul Hasan Khan

    (State Bank of Pakistan)

Abstract

This study measures the degree and the speed of the pass-through of the policy rate to individual banks’ retail rates in Pakistan, and investigates variation in interest rate pass through across banks in the context of banks’ market power and ownership structure. Monthly data of lending and deposit rates of 31 banks along with 6-month KIBOR (proxy for policy rate in this study) from June 2005 to October 2015 is used to estimate an unrestricted autoregressive distributed lag (ARDL) model. In aggregate, the results indicate the presence of co-integration between the 6-month KIBOR and banks’ retail rates. There is a complete pass-through from 6-month KIBOR to lending rate on fresh loans, and it takes only two months to realize the full impact. However, the pass-through is incomplete (0.58 bps in the long run and 0.37 bps in short run) in case of deposits. Large five banks have considerably different level of pass-through as compared to the small banks. Public sector commercial banks have relatively low level of pass-through as compared to the private banks. Furthermore, specialized banks have relatively low level of pass-through as compared to commercial banks.

Suggested Citation

  • Syed Zulqernain Hussain & Mahmood ul Hasan Khan, 2016. "Do Ownership Structure and Market Power Matter in Interest Rate Pass-through? Evidence from Pakistan’s Bank Level Data," SBP Working Paper Series 82, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:82
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    File URL: http://www.sbp.org.pk/publications/wpapers/2016/wp82.pdf
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    More about this item

    Keywords

    Pass-through; retail rates; bank-size;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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