Investigating the Causes of Interest Rate Spread in Banking Sector of Pakistan: A Panel Data Analysis

Authors

  • Muhammad Tariq Scholar, Iqra University, Karachi, Pakistan Author
  • Muhammad Hasan Scholar, Department of Commerce, University of Karachi, Pakistan Author
  • Fahad Ghani Scholar, Ilma University, Karachi, Pakistan Author
  • Atif Aziz Professor, Iqra Univerity Karachi, Pakistan Author

DOI:

https://doi.org/10.59075/3dvsgm59

Keywords:

Interest rate Spread, Market Share, Deposit, Non-Performing Loans, Admin Expenses.

Abstract

The main purpose of this research is to examine the underlying causes and key determinants of interest rate spread, aiming to identify the factors that influence variations in the interest rate spread among banks in Pakistan. To realize the objective of the research, the researcher relied on the panel data by using a dependent variable, namely, Banks' Interest Rate Spread, and independent variables, namely, Deposits, Non-Performing Loans, Administrative Expenses, and Market Share, regarding the sample of 30 Banks operating in Pakistan. The data pertains to the five years that are from 2011 till 2015, and the researcher obtained the dataset from the Pakistan Stock Exchange, PSE. The analysis started with applying the PLS in order to test the hypotheses of the study. In addition, the REM and FEM models were estimated and compared between PLS and FEM by the Redundant Fixed Effects Test, and between FEM and REM by the Correlated Random Effects - Hausman Test. All the statistical analysis was done using EViews8 software. This study found deposits and nonperforming loans to negatively and significantly influence the banks' interest rate spreads. On the other hand, administrative expenses and market share influence it positively and significantly. This was found consistent for the model under Fixed Effects Modeling (FEM) by comparing Panel Least Square and Fixed Effect model. However, the comparison results between FEM and the Random Effects Model (REM) suggested that REM is more efficient and appropriate. While testing all the variables we came across the idea that interest rate spread is determined by several factors which includes but not limited to Deposits, Non-Performing Loans, Administration Expenses and Market Share. It has also been concluded that Bank spread is significantly improved due to Market Share and Raise in Expenses in different perspectives, however, the deposits and Non- Performing Loans perspective could play negative role in Bank’s Performance or Spread determination.

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Published

2025-01-31

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