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

Ayesha Afzal · Nawazish Mirza

35 citations0/0 files storedEconomic Research-Ekonomska Istraživanja

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Banking stability, regulation, efficiency Monetary Policy and Economic Impact Banking Sector Performance and Management

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.

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