IDEAS home Printed from https://ideas.repec.org/p/eab/macroe/22209.html
   My bibliography  Save this paper

Determinants of Interest Spread in Pakistan

Author

Listed:
  • Idrees Khawaja

    (PIDE)

  • Musleh-ud Din

Abstract

Interest spread of the Pakistans banking industry has been on the rise for the last two years. The increase in interest spread discourages savings and investments on the one hand, and raises concerns on the effectiveness of bank lending channel of monetary policy on the other. This study examines the determinants of interest spread in Pakistan using panel data of 29 banks. The results show that inelasticity of deposit supply is a major determinant of interest spread whereas industry concentration has no significant influence on interest spread. One reason for inelasticity of deposits supply to the banks is the absence of alternate options for the savers. The on-going merger wave in the banking industry will further limit the options for the savers. Given the adverse implications of banking mergers for a competitive environment, we argue that to maintain a reasonably competitive environment, merger proposals may be subjected to review by an antitrust authority with the central bank retaining the veto over merger approval.

Suggested Citation

  • Idrees Khawaja & Musleh-ud Din, 2007. "Determinants of Interest Spread in Pakistan," Macroeconomics Working Papers 22209, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:macroe:22209
    as

    Download full text from publisher

    File URL: http://www.eaber.org/node/22209
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 443-456, June.
    2. Shaffer, Sherrill, 2004. "Comment on "What Drives Bank Competition? Some International Evidence" by Stijn Claessens and Luc Laeven," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 585-592, June.
    3. Robin A. Prager & Timothy H. Hannan, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence From The Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-452, December.
    4. Stijn Claessens & Luc Laeven, 2004. "What drives bank competition? Some international evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 563-592.
    5. Adolfo Barajas & Roberto Steiner & Natalia Salazar, 1999. "Interest Spreads in Banking in Colombia, 1974-96," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1-4.
    6. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-299, May.
    7. Ms. Laura Valderrama & Mr. Wendell A. Samuel, 2006. "The Monetary Policy Regime and Banking Spreads in Barbados," IMF Working Papers 2006/211, International Monetary Fund.
    8. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
    9. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184, National Bureau of Economic Research, Inc.
    10. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 657-680.
    11. Allen, Linda, 1988. "The Determinants of Bank Interest Margins: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 231-235, June.
    12. Philip L. Williams & Graeme Woodbridge, 2003. "Antitrust Merger Policy: Lessons from the Australian Experience," NBER Working Papers 9600, National Bureau of Economic Research, Inc.
    13. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    14. Ashoka Mody & Maria Soledad Martinez Peria, 2004. "How foreign participation and market concentration impact bank spreads: evidence from Latin America," Proceedings, Federal Reserve Bank of Cleveland, pages 511-542.
    15. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    16. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    17. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
    18. Haber, Stephen, 2004. "Comment on "How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America" by Maria Soledad Martinez Peria and Ashoka Mody," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 539-542, June.
    19. Franklin R. Edwards, 1965. "Concentration And Competition In Commercial Banking: A Statistical Study," Journal of Finance, American Finance Association, vol. 20(1), pages 101-102, March.
    20. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
    21. Timothy H. Hannan & J. Nellie Liang, 1993. "Bank commercial lending and the influence of thrift competition," Finance and Economics Discussion Series 93-39, Board of Governors of the Federal Reserve System (U.S.).
    22. repec:bla:jindec:v:46:y:1998:i:4:p:433-52 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ms. Tatum Blaise Pua Tan, 2012. "Determinants of Credit Growth and Interest Margins in the Philippines and Asia," IMF Working Papers 2012/123, International Monetary Fund.
    2. Mirza, Nawazish & Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Rahat, Birjees, 2016. "Potential of market discipline in Pakistan: The bank depositors’ perspective:," PSSP working papers 40, International Food Policy Research Institute (IFPRI).
    3. Imran, Kashif & Nishat, Mohammed, 2013. "Determinants of bank credit in Pakistan: A supply side approach," Economic Modelling, Elsevier, vol. 35(C), pages 384-390.
    4. Abdul Qayyum & Idrees Khawaja & Asma Hyder, 2008. "Growth Diagnostics in Pakistan," PIDE-Working Papers 2008:47, Pakistan Institute of Development Economics.
    5. Murad Khan & Abdul Jalil, 2020. "Determinants of Interest Margin in Pakistan: A Panel Data Analysis," Economies, MDPI, vol. 8(2), pages 1-14, March.
    6. Hossain, Monzur, 2012. "Financial reforms and persistently high bank interest spreads in Bangladesh: Pitfalls in institutional development?," Journal of Asian Economics, Elsevier, vol. 23(4), pages 395-408.
    7. Sheikh Khurram Fazal & Muhammad Abdus Salam, 2013. "Interest Rate Pass-Through: Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 39-62, Jan-June.
    8. Romila Qamar & Shahid Mansoor Hashmi & Jaleel Ahmed & Ahmed N.K. AlFarra, 2016. "Are Capital Buffers Countercyclical ? An Evidence From Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(61), pages 123-146, September.
    9. Tan Zhongming & Samuel Frimpong & Ding Guoping, 2019. "Impact of Financial Risk Indicators on Banks' Financial Performance in Ghana," Business and Economic Research, Macrothink Institute, vol. 9(4), pages 23-52, December.
    10. Nadeem Ul Haque & Musleh-ud Din & Lubna Hasan, 2007. "Research at PIDE: Key Messages," PIDE Books, Pakistan Institute of Development Economics, number 2007:2.
    11. Florin Aliu & Orkhan Nadirov, 2016. "Kosovo Banking Paradox," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 2(4), pages 11-22, December.
    12. Mehwish Aziz Khan & Attiya Javid, 2011. "Effect of Mergers and Acquisitions on Market Concentration and Interest Spread," Journal of Economics and Behavioral Studies, AMH International, vol. 3(3), pages 190-197.
    13. Norman Zakiyy & Kamal Halili Hassan, 2016. "The Management Process at the Pretrial Stage under Malaysian Rules of Court 2012," European Journal of Economics and Business Studies Articles, Revistia Research and Publishing, vol. 2, ejes_v2_i.
    14. Muhammad Waqas Chughtai & Muhammad Waqas Malik & Rashid Aftab, 2015. "Impact of Major Economic Variables on Economic Growth of Pakistan," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(2), pages 94-106, April.
    15. Faris Nasif Al Shubiri & Syed Ahsan Jamil, 2017. "Assessing the Determinants of Interest Rate Spread of Commercial Banks in Oman: An Empirical Investigation," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 90-108.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Idrees Khawaja, 2011. "Interest Margins and Banks’ Asset-Liability Composition," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 255-270, September.
    2. Putkuri, Hanna, 2010. "Housing loan rate margins in Finland," Research Discussion Papers 10/2010, Bank of Finland.
    3. Nguyen, Thach V.H. & Nguyen, Thai Vu Hong, 2022. "How do banks price liquidity? The role of market power," Global Finance Journal, Elsevier, vol. 53(C).
    4. R. Gaston Gelos, 2009. "Banking Spreads In Latin America," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 796-814, October.
    5. Omar Masood & Bruno Sergi, 2011. "China’s banking system, market structure, and competitive conditions," Frontiers of Economics in China, Springer;Higher Education Press, vol. 6(1), pages 22-35, March.
    6. Putkuri, Hanna, 2010. "Housing loan rate margins in Finland," Bank of Finland Research Discussion Papers 10/2010, Bank of Finland.
    7. Simone Miyuki Hirakawa & Rodrigo De Losso da Silveira Bueno, 2011. "Does location matter toexplain loan interest rates? Evidence from Brazilian local bankingmarkets," Anais do XXXVII Encontro Nacional de Economia [Proceedings of the 37th Brazilian Economics Meeting] 127, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    8. repec:zbw:bofrdp:2010_010 is not listed on IDEAS
    9. Espino, Freddy & Carrera, César, 2006. "Concentración bancaria y margen de las tasas de interés en Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 13.
    10. Koffie Ben Nassar & Edder Martinez & Anabel Pineda, 2014. "Determinants of Banks' Net Interest Margins in Honduras," IMF Working Papers 2014/163, International Monetary Fund.
    11. Raja Almarzoqi & Sami Ben Naceur, 2015. "Determinants of Bank Interest Margins in the Caucasus and Central Asia," IMF Working Papers 2015/087, International Monetary Fund.
    12. Philip Brock & Helmut Franken M., 2003. "Measuring the Determinants of Average and Marginal Bank Interest Rate Spreads in Chile, 1994-2001," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(3), pages 45-65, December.
    13. Birchwood, Anthony & Brei, Michael & Noel, Dorian M., 2017. "Interest margins and bank regulation in Central America and the Caribbean," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 56-68.
    14. Gerlach, Jeffrey R. & Mora, Nada & Uysal, Pinar, 2018. "Bank funding costs in a rising interest rate environment," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 164-186.
    15. Jung, Yong-Gook & Kim, Jinyong, 2023. "Banks’ net interest rate spread and the transmission of monetary policy in Korea," Journal of Asian Economics, Elsevier, vol. 89(C).
    16. Mudeer A. Khattak & Buerhan Saiti & Shabeer Khan, 2023. "Does market power explain margins in dual banking? Evidence from panel quantile regression," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1826-1844, April.
    17. Andrieş, Alin Marius & Căpraru, Bogdan, 2014. "The nexus between competition and efficiency: The European banking industries experience," International Business Review, Elsevier, vol. 23(3), pages 566-579.
    18. Ronald Kumar & Arvind Patel, 2014. "Exploring competitiveness in banking sector of a small island economy: a study of Fiji," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(6), pages 3169-3183, November.
    19. Arnold, Ivo J.M. & van Ewijk, Saskia E., 2012. "The quest for growth: The impact of bank strategy on interest margins," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 18-27.
    20. firano, zakaria & filali Adib, fatine, 2018. "Competition and financial stability: a new paradigm," MPRA Paper 95167, University Library of Munich, Germany.
    21. Matthews, Kent & Murinde, Victor & Zhao, Tianshu, 2007. "Competitive conditions among the major British banks," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2025-2042, July.

    More about this item

    Keywords

    Banks; Determination of Interest Rates; mergers; Acquisitions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eab:macroe:22209. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Shiro Armstrong (email available below). General contact details of provider: https://edirc.repec.org/data/eaberau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.