Interest Rate Sensitivity of Depositors in Non-Financial Banks: A Case of an emerging Economy

Abstract

This study uses 62 years of data, from 1960 to 2021, including variables like deposits, interest rates, GDP, and inflation, to investigate the link between interest rates and deposit behavior in non-Islamic banks in Pakistan. The study finds that interest rates have a big influence on deposit behavior using time series analytic techniques as unit root testing, cointegration analysis, and Vector Error Correction Model (VECM). More specifically, people's decisions to deposit money in non-Islamic banks are observed to be influenced by interest rate variations. The results highlight the importance of interest rate changes in influencing deposit behavior, showing how people choose which non-Islamic institutions to deposit money with. These findings have significance for financial institutions, policymakers, and economists in general. They provide important new information about the ways in which monetary policy choices affect deposit mobilization and liquidity conditions in the banking industry. The report also proposes directions for further investigation, including the possible examination of differences in deposit behavior between demographic groupings or geographical areas. To further help understand the dynamics at work, it also suggests examining how interest rates affect deposits in various sample configurations. This research advances theoretical frameworks in the field by shedding light on the complex interactions between interest rates and deposit behavior. It also offers stakeholders practical guidance on how to deal with the effects of interest rate dynamics on deposit mobilization and banking sector liquidity.