Abstract
Evidence shows that the interest rate pass-through increases (declines) in the high (low) banking sector competition regimes, whereas the loan intermediation mark-up declines (increases). The interest rate pass-through is generally much higher during monetary policy tightening cycles compared to loosening cycles, irrespective of banking sector competition regimes. This indicates prevalence of asymmetric lending rate reaction. The asymmetric lending rate response to the policy rate is exacerbated by the low banking sector competition, the prevailing economic conditions, banking sector NPLs and Excess CAR. Excess CAR acts as some form of barrier to entry in the banking sector which lower interest rate pass-through. Hence there is a case for a rigorous financial regulatory which includes differentiated framework for lower-tier banks.
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