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Interest Rate Spreads in an Emerging Economy: The Case of Pakistan’s Commercial Banking Sector

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  • Ayesha Afzal
  • Nawazish Mirza

Abstract

This paper explores the determinants of interest rate spreads in Pakistan’s commercialbanking sector in post transition period (2004 – 2009) using an exhaustive set of macro andfirm level variables to analyze their impact on intermediary efficiency. We introduce twoinnovative variables of default likelihood indicator (Black Merton and Scholes option pricing framework) and proportion of public sector deposits in total deposits to explain thevariation in spreads.The results suggest that intermediary efficiency is affected by bank size, operationalefficiency, asset quality, liquidity, risk absorption capacity and GOP growth rate. Thereis evidence for deposit market share as well as deposit market concentrationestablishing the presence of an interest sensitive deposit market. We could not find support for impact of interest rate volatility and financial development indicator on banking spreads.

Suggested Citation

  • Ayesha Afzal & Nawazish Mirza, 2012. "Interest Rate Spreads in an Emerging Economy: The Case of Pakistan’s Commercial Banking Sector," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 25(4), pages 987-1004, January.
    • Handle: RePEc:taf:reroxx:v:25:y:2012:i:4:p:987-1004
    DOI: 10.1080/1331677X.2012.11517543
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    Cited by:

    1. Umar, Muhammad & Mirza, Nawazish & Rizvi, Syed Kumail Abbas & Furqan, Mehreen, 2023. "Asymmetric volatility structure of equity returns: Evidence from an emerging market," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 330-336.
    2. Mirza, Nawazish & Afzal, Ayesha & Umar, Muhammad & Skare, Marinko, 2023. "The impact of green lending on banking performance: Evidence from SME credit portfolios in the BRIC," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 843-850.
    3. Chen, Zhonglu & Umar, Muhammad & Su, Chi-Wei & Mirza, Nawazish, 2023. "Renewable energy, credit portfolios and intermediation spread: Evidence from the banking sector in BRICS," Renewable Energy, Elsevier, vol. 208(C), pages 561-566.
    4. Mirza, Nawazish & Rahat, Birjees & Naqvi, Bushra & Rizvi, Syed Kumail Abbas, 2023. "Impact of Covid-19 on corporate solvency and possible policy responses in the EU," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 181-190.
    5. Mirza, Nawazish & Umar, Muhammad & Afzal, Ayesha & Firdousi, Saba Fazal, 2023. "The role of fintech in promoting green finance, and profitability: Evidence from the banking sector in the euro zone," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 33-40.

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