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

Mahmood ul Hasan Khan (mhkhan45@hotmail.com) and Bilal Khan
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Bilal Khan: State Bank of Pakistan

SBP Research Bulletin, 2010, vol. 6, 15-36

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.

Keywords: interest rate spread; panel data; competition (search for similar items in EconPapers)
JEL-codes: C23 D40 G21 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (7)

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