Presentation 29-09-2011- final
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This document analyzes the determinants of interest rate spread in the Pakistani banking sector from 2003-2010. It specifies models to examine how bank-specific factors like non-performing loans, liquidity risk, and operational costs, as well as macroeconomic factors like inflation, exchange rates, and money supply, influence interest rate spread. The study finds that most bank-specific and macroeconomic variables have a statistically significant impact on interest rate spread. It concludes that interest rate spread in Pakistan is sensitive to both bank internal conditions and the external macroeconomic environment.
Presentation 29-09-2011- final
- 1. DERERIMENANTS OF INTEREST RATE SPREAD: A CASE OF PAKISTANI BANKING SECTOR By AKMAL SHAHZAD BUTT Reg #10759 MS – FINANCE DEPARTMENT OF MANAGEMENT SCIENCES IQRA UNIVERSITY ISLAMABAD Saturday, August 11, 2012
- 2. Outline Introduction Problem Identification Objective of Study Contribution of Study Literature Review Model Specification Methodology Data Result & Discussion Conclusion Limitation Future Implication References Saturday, August 11, 2012
- 3. INTRODUCTION Financial Institution: Provide Finance to other Sectors to perform economic activity. Channelize the fund from surplus to deficit area. Role of FI in Economy High cost of finance create hurdle in economic activity which slow down the economic development FI consists of banking and non banking institutions Banks, as FIs, are the primary unit of the financial system which is an active player of economic development Bank differ with each other by Assets, No of employees, technology adopted, lending policies, Risk behavior etc On base of internal /External each bank have its own status in market All banks react differently to macro economic factors Saturday, August 11, 2012
- 4. INTRODUCTION Interest Rate Spread: Role of IRS in Economy: Interest Rate Spread (IRS) and a prominent indicator of efficiency of the banking sector. IRS, in an economy, has crucial implication for the growth and development, as numerous authors suggest a critical link between efficient intermediate and economic growth e.g. (Quaden, 2004) Saturday, August 11, 2012
- 5. PROBLEM IDENTIFICATION Implementation of new Technology has a critical role in banking services by reducing risk and cost. Extent to which the Pakistani bank has adopted the new technology and awarance in Public Saturday, August 11, 2012
- 6. OBJECTIVE OF STUDY To explore the determinant of IRS in Pakistani Banking Sector. To find out the sensitivity of IRS to bank specific, market specific and macroeconomic factors in Pakistani banking sector. Saturday, August 11, 2012
- 7. CONTRIBUTION OF STUDY This study creates the awarance in stake holders for better use and gain the benefit of new technology This study also highlights the determinants of IRS in Pakistani banking sector as limited publish work is available. Saturday, August 11, 2012
- 8. LITERATURE REVIEW • Quaden (2004), declared efficient intermediation benefits the real economy by allowing higher expected return for saver and providing more opportunity by cheep investible fund. • Researchers believe that bank specific variables have significant role in determining the IRS (Gelos, 2006; Kunt and Huizinga, 1998). • Qayyum & Khan (2006) described the merger wave in Pakistani banking sector in term of technology adoption • Aziz et al. (2010) discussed the factor which can reduce current higher IRS especially macro and fiscal factor. Saturday, August 11, 2012
- 9. LITERATURE REVIEW Technology literature recognizes that technology development has enhanced the operational efficiency of business. The use of technology is not new in banking sector. It has significant impact on the banking sector. Degryse et al. (2010) argues the technology has power to shape the bank and customer interaction. Technological change brings the changes in market structure and organization structure too. Mocetti et al. (2010) claim the technology improvement enforces decentralized banking structure. A rich literature exists on cost efficiency role of technology in banking sector but it has not taken as one of the determinant of IRS. Saturday, August 11, 2012
- 10. LITERATURE REVIEW Manjo (2010) included the technology development as determinant of banking sector efficiency while studying the old banks in kerala India. As technology development required more fund to cope with the market. So the operational expense increases dramatically. Such controversy can be resolved by an unbiased quantitative analysis of the determinant of IRS in a developing country. Saturday, August 11, 2012
- 11. MODEL SPECIFICATION Bank Specific Saturday, August 11, 2012
- 12. MODEL SPECIFICATION Macro Economic Saturday, August 11, 2012
- 13. MODEL SPECIFICATION Saturday, August 11, 2012
- 14. Hypothesis H1: Bank Specific Factors have significant impact on Interest Rate Spread (IRS) H2: Macroeconomic Factors have significant impact on Interest Rate Spread (IRS) H3: Market Specific Factors have significant impact on Interest Rate Spread (IRS) Saturday, August 11, 2012
- 15. METHODOLOGY Data: This study examined the determinants of interest rate spread in Pakistani banks for the period of 08 years from 2003 to 2010. Population of the study comprise of Private Banks, state own banks and foreign banks. Banks selected on the basis of data availability of study major variables Saturday, August 11, 2012
- 16. METHODOLOGY Procedure: EVIEWS soft ware used for analysis. To check stationarity ADF test applied. Descriptive analysis was used to identify the level of macro, Bank and market specific variables. Correlation were checked among the variables. Panel Regression techniques were used to measures the relationship among the Bank, Macro and Market Specific Variables. Saturday, August 11, 2012
- 17. RESULTS & DISCUSSION Saturday, August 11, 2012
- 18. Variable I II III VI VII VIII IX X XI X NW -0.002 (0.97) IDBEA -0.03 -0.03 (0.87) (0.87) NIBDOPA 1.05 1.02 1.02 (0.59) (0.60) (0.59) LR -0.03 -0.03 -0.03 -0.03 (0.45) (0.45) (0.47) (0.50) BLBSL 7.14 7.14 7.14 7.14 3.27 (0.01) (0.01) (0.01) (0.01) (0.54) BDBSD -5.86 -5.86 -5.86 -5.86 -4.45 -4.45 (0.00) (0.00) (0.00) (0.00) (0.12) (0.14) Saturday, August 11, 2012
- 19. Variable I II III VI VII VIII IX X XI X OPCTA -5.87 -5.87 -5.87 -5.87 -13.28 -12.99 -12.99 -6.68 (0.37) (0.36) (0.35) (0.38) (0.08) (0.09) (0.08) (0.04) SROPR -12.54 -12.54 -12.54 -12.54 -7.98 -7.98 -7.98 -0.58 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) TLNW -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.56 (0.017) (0.02) (0.02) (0.02) (0.00) (0.00) (0.00) (0.01) NE 0.688 0.688 0.688 0.688 0.95 0.95 0.95 0.14 (0.02) (0.02) (0.02) (0.02) (0.00) (0.00) (0.00) (0.07) NIITI 2.30 2.30 2.30 2.30 2.81 2.66 2.66 0.45 (0.00) (0.00) (0.00) (0.01) (0.02) (0.02) (0.02) (0.02) Saturday, August 11, 2012
- 20. Variable I II III VI VII VIII IX X XI X IFI -0.13 (0.00) TFI -0.21 (0.00) CR7 -85.38 -7.01 (0.00) (0.00) MS -1.3 -2.69 (0.00) (0.04) DBTL 6.23 6.61 (0.00) (0.02) DGDP -2.93 -2.97 Saturday, August 11, 2012
- 21. Variable I II III VI VII VIII IX X XI X ER -0.51 -0.52 (0.00) (0.01) EGDP 0.14 0.17 (0.00) (0.00) INF -0.18 -0.17 (0.00) (0.03) M2GDP 0.24 0.26 (0.00) (0.00) Constant 2.71 2.78 2.69 3.19 2.21 2.22 2.10 4.89 3.89 3.66 R2 Adjusted 0.79 0.79 0.79 0.82 0.69 0.69 0.69 0.89 0.98 0.71 F-Statistics 15.29 16.53 17.87 21.57 12.57 14.57 14.57 20.89. 271 69.43 F-Stat (Prob) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 D-Watson 2.08 2.08 2.07 2.09 1.93 1.93 1.97 Saturday, August 11, 2012 2.07 1.87 1.90 Stat
- 22. CONCLUSION . Empirical result of this study reveals that spread is significantly cause by Operating Cost, Non interest revenue, Technological development, Concentration ratio, Market Size, Domestic Borrowing and Fiscal deficit. Results of our study are evident that bank with more operating cost pass on to client by setting high interest rate on lending and lower rate on deposit. Further more banks also protect themselves in high uncertainty and inflationary environment by creating gap between lending and deposit rate. Saturday, August 11, 2012
- 23. CONCLUSION As Pakistani banking sector introducing new technology in bank operations, this required more investment and increasing cost Hunter and Timme (1991). This cost is also passed on to the clients Finally, instable macroeconomic environment, high inflation, exchange rate volatility, budgetary deficit and govt. dependency on local bank have a significant role in higher IRS in banking sector. Further more component of Governance such corruption, Property right etc also behind the high IRS. Saturday, August 11, 2012
- 24. RECOMENDATIONS Both the bank and policy maker should device the strategy to encourage adopting the new technology, reduce the uncertainty by improving law and order situation, controlling inflation and exchange rate. Also focus to break the existing organized cartel in banking sector. Fiscal deficit increase the burden on financial sector, Govt. should reduce the deficit by decreasing the non developing expenditure It is also important to educate the customer regarding technology adoption. Saturday, August 11, 2012
- 25. LIMITATION First, third world countries, there is no proper record for previous year Second, lack of access to data bases like world economic indicators is limited which also creates hurdles for included variables Saturday, August 11, 2012
- 26. FUTUR IMPLICATIONS This study includes the traditional variables and added technology as determinant of IRS. In future, number of years and bank can be increased. Researcher should explore the link of Terrorist wave with IRS and Banking operations. The energy crises impact on IRS required to investigate Saturday, August 11, 2012
- 27. REFERENCES Quaden, G. (2004). Efficiency and stability in an evolving financial system. www.bnb.be/Sg/En/Contact/pdf/2004/sp040517en.pdf Kunt, A. D., & Huizinga, H. (1999). Determinants of Commercial Bank Interest Margin and Profitability: Some International Evidence. World Bank Policy Research Working Paper No. 1900 Qayyum, A., & Khan, S. (2006). X-Efficiency, Economy of Scale, Techological Progress and Competition of Paksitani's Banks. Paksitan Institute of Deveolpement Economics Islamabad . Aziz, Jabran ; Raza, Ahsan ; Rehman, Kashif; Zaheer, Babar; Raza, Mohsin (2010) Higher / Inflated Spread: A Poison Pill for Financial Sector Measures to Turn Down Banking Spread, Special Study for Pakistani Banking Industry . IJCRB Vol. 2 No. 4 Manoj P. K. (2010) Impact of Technology on the Efficiency and Risk Management of Old Private Sector Banks in India: Evidence from Banks Based in Kerala. European Journal of Social Sciences – Vol. 14, No. 2 Saturday, August 11, 2012