Towards determination of interest spread of commercial banks: Empirical evidences from Pakistan

Abstract

This study employs panel data models to examine bank-specific determinants of interest rate spread of a sample of 14 out of 22 commercial banks in Pakistan for the period of 2000 to 2008. Rising administrative costs, nonperforming loans and soaring return on assets (ROA) significantly cause an increase in the spread of interest rate. Results of this study are similar to Doliente (2003), Claeys and Vennet (2004), and Idrees (2007) in finding the factors affecting interest margin. The study endorses findings of Horvath (2009) that the most efficient banking structure persists and sustains with minimum possible interest margins in competitive environment of free market economies. The study, though finds increasing competition in the banking industry, this competition is imperfect in Pakistan. The study finds significant difference in their management style. The Hausman (1978) and redundant fixed effects tests support fixed effects model. High interest spread may lead to institutional inefficiency of the financial system of the country. Key words: Pakistan, interest margin, bank-specific factors, panel data models.