Average Lending Rate Research Articles

Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana

This study assesses the dynamic relationship between macroeconomic factors and bank asset quality based on changes in the condition of stock market returns. A dynamic panel two-step system, the Generalized Method of Moments (system GMM) model, is employed using panel data from 18 universal banks spanning the period of 2007 to 2021. The analysis revealed that the real GDP growth rate, the average lending rate, and the real exchange rate represent a set of macroeconomic factors with a marked influence on banks’ asset quality, where a unit increase in these variables drive 0.02 percent, 0.98 percent, and 0.27 percent improvement in asset quality, respectively. In addition, a high-inflation rate was found to exert an adverse effect of −0.32 percent on asset quality, as it affects borrowers’ financial ability to meet loan repayment obligations. Furthermore, the study verified the existence of a positive relationship between market condition and asset quality, where a rise in the market return drives a 0.07 percent improvement in bank asset quality. This implies that bank performance adapts to changes in market conditions as posited under the Adaptive Market Hypothesis (AMH). Bank managers should consolidate banks’ asset bases during conditions of market stability to withstand periodic market fluctuations to boost trading momentum. Policy recommendations are suggested to foster a conducive business environment for bank stability.

EFFECT OF CREDIT RISK MANAGEMENT ON THE FINANCIAL PERFORMANCE OF BANKING SECTOR OF BANGLADESH: A STUDY ON GENERATION-BASED SELECTED LISTED COMMERCIAL BANKS

<p>The financial sector of the country is mostly comprised of banking institutions; those are leading the economy with great exposure with the contribution to the development process. However, the banking sector of Bangladesh is disturbed by the large-scale amount of non-performing loans while has become an essential part of the finance of the industries. As part of the measurement of credit risk and macro factors average lending rate, inflation, NPL size, capital adequacy ratio, liquidity ratio have been selected to test the influence on the financial performance found through the return on asset of the selected banks. To conduct the study 9 banks of three generations have been selected for the period of 2016 to 2022. Robust least square method of regression and error correction term have been run to oversee the real impact on financial performance while endogenity and random walk in the values are being considered to overcome through a dynamic regression model. NPL has a negative impact on the performance and average lending rate, inflation, liquidity ratio and capital adequacy ratio bring a positive impact on the financial performance of the banks. Breusch-Pagan LM test confirms that cross-sectional dependency exists and VAR serial correlation test finds autocorrelation in the data set. The policy implication of this study suggests that the high NPL ratio must be reduced and CAR and LR must be improved to get the desired results of the performance. Strong fiscal and banking regulation should implement so that governance can be ensured to create responsibility and financial strength.</p><p><strong>JEL:</strong> E4, D81, E33, E44</p><p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/soc/0045/a.php" alt="Hit counter" /></p>

Monetary policy transmission in India under the base rate and MCLR regimes: a comparative study

The paper estimates the degree of pass-through of monetary policy to bank lending rates under both the base rate and the marginal cost of funds-based lending rate (MCLR) regimes using dynamic panel data regression. Using nine different models for nine individual bank-specific variables, the study estimates that a 100 basis point increase in the policy rate leads to an increase in the weighted average lending rate on fresh rupee loans sanctioned by banks over the long run by 26–47 basis point-depending on the model specification- during the MCLR regime as against 11–19 basis point during the base rate regime. Hence, irrespective of the model chosen, transmission is higher during the MCLR regime than base rate regime. The alignment of liquidity management with the monetary policy stance, the introduction of the flexible inflation targeting (FIT) framework and the deceleration in economic activity reducing credit demand could be contributory factors for better transmission during the MCLR regime.

Interest rates and Islamic commercial property financing: can there be a possible solution?

PurposeThis study aims to investigate the dynamic interaction between interest rates and commercial property financing offered by Islamic banks in Malaysia.Design/methodology/approachThe authors use the autoregressive distributed lag (ARDL) cointegration methodology to analyse the short- and long-run effect of the interest rates and rental rates on commercial property financing of Islamic banks in Malaysia between 2010: Q1 and 2018: Q2.FindingsThe findings reveal that changes in interest rates affect Islamic commercial property financing. This indicates that Islamic banks still rely on interest rates as a benchmark without fully implementing Islamic rental rates. This corroborates the subsequent finding, where overnight policy rates influence commercial property financing.Research limitations/implicationsDespite the authors’ attempt to provide insights into Islamic commercial property financing, the study is limited to secondary data; further research can use survey information to obtain other details that are not included in this study. Similarly, this study does not cover the operation and financial lease debate in Musharakah Mutanaqisah. Future studies can examine the challenges faced by the financial institution towards implementing rental rates in other emerging and developing countries using a different methodology.Originality/valueThis study is the first to investigate the dynamic changes in overnight policy rates, average lending rates and rental rates on Islamic commercial property financing in Malaysia using ARDL techniques. The authors uncover the research and institutional implications of Islamic commercial property financing rates and provide policy and future research directions coupled with the proposed modified rental rate to be developed.

Cooling the mortgage loan market: The effect of borrower-based limits on new mortgage lending

This paper studies the effects of regulatory measures concerning maximum loan-to-value (LTV), debt-to-income (DTI), and debt service-to-income ratios (DSTI) on new loans secured by residential property. It uses loan-level regulatory survey data on about 82,000 newly granted residential mortgage loans in Czechia from 2016 to 2019 to estimate the average effects of regulatory measures and their heterogeneous effects depending on borrower, loan, bank, and regional characteristics. We find that the LTV limits decreased the mortgage loan size only slightly, while the value of collateral securing the loans increased. Only the additional DTI and DSTI limits helped reduce the average loan size significantly and prompted more risk-sensitive pricing that heighten the average lending rate. The mortgage market response to the limits appears heterogeneous in loan size rather than pricing or collateralization. The loan size reduction varied with the borrower’s income, age, and location. High-income, high-repayment, and 25 to 35 years old borrowers reduced their contracted loan size more. Borrowers located in regions with higher GDP per capita and lower unemployment rates reduced the contracted loan size more. Longer-maturity loans showed a greater drop in the contracted loan size.

Pass-through of Change in Policy Interest Rate to Market Rates

Monetary policy has been aggressively used by the central Bank of Pakistan, in this decade, first to bolster growth and then to contain rampant inflation. Despite the sufficiently tight monetary policy that has remained in vogue in recent times, the inflation is still around 20 percent. This has raised questions about the effectiveness of monetary policy. One possible reason for the lesser effectiveness, if not failure, of monetary policy in taming inflation could be that in recent times, inflation was primarily supply driven and that the monetary tightening was in part offset by fiscal expansion, on the back of heavy bank borrowing by the government. However one cannot rule out the possibility that market imperfections might have also impeded the effectiveness of monetary policy in taming inflation to the desired extent. Incomplete and slow pass through of changes in policy interest rate to deposit rate and lending rate is a kind of imperfection that constrains the effectiveness of monetary policy. This study examines the pass through of policy interest rate to different market rates. Monetary theory predicts that the change in policy interest rate influences the cost capital which in turn influences consumption, savings, investments, and hence output. However if the impact of the change in policy rate on the cost of capital is less than one for one or if the change in policy rate fails to influence the cost capital immediately then the impact on output would become visible only with a certain lag and the impact would be less than one for one. This implies that if for example only 70 percent of the change in policy rate is passed on to cost of capital, then to manage an increase of 100 basis points in cost capital the policy rate should be raised by 143 basis points. This example serves to emphasise that for effective monetary management knowledge of the magnitude of passthrough of policy rate and the lag structure with which the policy rate influences cost of capital is important. Substantive empirical evidence confirms that changes in policy interest rate are transmitted to the output with a certain lag and that the pass-through of changes in policy rate to output or to other elements of the transmission channel may be less than one for one. Given the policy implications of the information, on the magnitude of pass through and the lag structure with which the policy rate influences different market rates, this Paper seeks to measure the pass-through of the changes in six month Treasury bill rate to six month KIBOR, six month weighted average deposit rate and weighted average lending rate. The study is focused on Pakistan.

ARIMA Modelling of Weighted Average Lending Rates (WALR) of Indian Scheduled Commercial Banks and Estimation of VaR : Implications on Asset-Liability Management (ALM)

ARIMA Modelling of Weighted Average Lending Rates (WALR) of Indian Scheduled Commercial Banks and Estimation of VaR : Implications on Asset-Liability Management (ALM)

The effect of credit risk management and bank-specific factors on the financial performance of the South Asian commercial banks

PurposeAmong all of the world's continents, Asia is the most important continent and contributes 60% of world growth but facing the serving issue of high nonperforming loans (NPLs). Therefore, the current study aims to capture the effect of credit risk management and bank-specific factors on South Asian commercial banks' financial performance (FP). The credit risk measures used in this study were NPLs and capital adequacy ratio (CAR), while cost-efficiency ratio (CER), average lending rate (ALR) and liquidity ratio (LR) were used as bank-specific factors. On the other hand, return on equity (ROE) and return on the asset (ROA) were taken as a measure of FP.Design/methodology/approachSecondary data were collected from 19 commercial banks (10 commercial banks from Pakistan and 9 commercial banks from India) in the country for a period of 10 years from 2009 to 2018. The generalized method of moment (GMM) is used for the coefficient estimation to overcome the effects of some endogenous variables.FindingsThe results indicated that NPLs, CER and LR have significantly negatively related to FP (ROA and ROE), while CAR and ALR have significantly positively related to the FP of the Asian commercial banks.Practical implicationsThe current study result recommends that policymakers of Asian countries should create a strong financial environment by implementing that monetary policy that stimulates interest rates in this way that automatically helps to lower down the high ratio of NPLs (tied monitoring system). Liquidity position should be well maintained so that even in a high competition environment, the commercial is able to survive in that environment.Originality/valueThe present paper contributes to the prevailing literature that this is a comparison study between developed and developing countries of Asia that is a unique comparison because the study targets only one region and then on the basis of income, the results of this study are compared. Moreover, the contribution of the study is to include some accounting-based measures and market-based measures of the FP of commercial banks at a time.

Determinants of commercial bank loan and advance disbursement: the case of private Ethiopian commercial banks

PurposeThis paper aimed to investigate the determinants of loans and advances from commercial banks in the case of Ethiopian private commercial banks.Design/methodology/approachThe study randomly selected seven commercial banks to represent the population stratified on their asset, deposit and paid-up capital amounts. The study utilized an unbalanced panel data model as each bank started operation at a different period of time and considered the period 1995–2016 for secondary details.FindingsThe findings showed that the deposit size, credit risk, portfolio investment, average lending rate, real gross domestic product (GDP) and inflation rate had significant and optimistic effects on the lending and advancement of private commercial banks. On the contrary, liquidity ratio had significant and negative effects on private commercial bank loans and advances. Finally, the study forwarded a feasible recommendation for concerned organs to focus on deposit size, credit risk, portfolio investment, average lending rate, real GDP, inflation rate and liquidity ratio. The results of this study will help banking industry policymakers and planners understand how to minimize inflation and unemployment by improving development and sustainable economic growth.Originality/valueThe findings of this study can also affect the general attitudes of a society by increasing knowledge and improve the quality of life for the general public.

COST OF FUNDS DEREGULATION ON AGRICULTURAL INVESTMENTS IN NIGERIA: AN ANALYSIS

The study examined agricultural investments in the light of deregulating the cost of funds. Factors that determine aggregate credit volume to the sector within the costs of funds regulated and deregulated periods and; the growth level in agricultural credit within the deregulated period were the specific objectives. Secondary data were used, sourced from Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS). Data were analyzed using Co-integration technique and Real Credit Growth Rate Model. The Co-integration results showed that in the long-run, average interest lending rate and budgetary allocation were key variables on aggregate credit volume to agricultural sector. In the short-run, savings mobilized by financial institutions, the average lending rate, previous year's average saving rate, inflation rate and government budgetary allocation to the sector were the significant variables on credit volume to agriculture. The result of the real credit growth rate within the deregulated period was 8.91%. Arising from this, therefore, the study recommended a complete unbundling of the markets as it will ensure funds availability for investments in the sector.Keywords: Agricultural investments, cost of funds, deregulation, Nigeria.JEL Classifications: G11, Q14DOI: https://doi.org/10.32479/ijefi.8922

THE IMPACT OF TRADE OPENNESS ON MANUFACTURING SECTOR PERFORMANCE

Trade openness plays a vital role in boosting the production of the manufacturing sector. Two opposing perspectives identify trade-growth nexus. One posits that trade openness will stifle industrial productivity while the opposing view believes that manufacturing productivity can be enhanced by a trade liberalization regime. This study investigates the instantaneous and jointly dynamic effect of trade openness along with macroeconomic variables (i.e., Malaysian exchange rate and average lending rate) and the event of economic crises on manufacturing sector performance in Malaysia using data from 1981 to 2016. This study employed a distributed lag model. The Augmented Dickey-Fuller (ADF) unit root test was adopted to determine the stationarity of time series data. The empirical results revealed that the effect of both instantaneous and the jointly dynamic effect of the percentage change in trade openness on manufacturing production growth in Malaysia are positive and significant. However, the effects of the percentage change in exchange rate and percentage change in average lending rate are insignificant. Economic crisis has a significant negative impact on Malaysian manufacturing production growth. Therefore, the results strongly recommend that the direction of trade policy in Malaysia should be formulated based on outward-looking strategies.

Magnitude of investment and global value chain: a case study of textile and clothing industry of Pakistan

The objective of this study is to assess the impact of value addition chain and investment size on the sales revenue of export-oriented firms in Pakistan. Pakistan is severely facing the economic crisis because of its declining exports and growing external debt. The manufacturing of the intermediate products – yarn and fabric – belong to the capital-intensive industries. The large part of these products is exported to USA, China, European Union and Bangladesh. The importing partners convert these intermediate products into finished goods (garments, home textile, towel, etc.). Similarly, the finished goods which are produced by Pakistani companies and exported directly by the producers or small-scale brokerage houses do not have Pakistani brand names. The clothing sector companies in European Union and USA sale these products in super stores and retail shops under their brand names. This mechanism explains the distribution of benefits through the global value addition chain in textile and clothing industry. It is hypothesized in this study that sale revenues of textile manufacturing companies ares determined by the size of investment, type of products (stage of the integration), average lending rates, exchange rate in term of rupees per US dollar and the market access. Data for this analysis was extracted from the Annual Reports of the companies listed on Pakistan Stock Exchange. The data consists of 248 companies and 14 years (from 2003 to 2016). Through this panel data we quantified the impacts of the size of investment and the stage of value addition in textile chain on sales revenue. It is concluded that size of a company is a serious matter, while the total assets lead further increase in the sales revenue, however the negative sign with significant and robust parameters attached with the composite variable of the large companies’ category and value of its total assets reflects the decreasing rate of return on additional investment in large-scale companies. The devaluation of Pakistani currency has been positively affecting the sales of exporting sector companies. However, the lending rate of interest has not shown a significant impact.

Measuring correlation between inflation rate and weighted average lending rate of private and public sector banks in India

Measuring correlation between inflation rate and weighted average lending rate of private and public sector banks in India

Effect of Interest Rates on Private Sector Debt in Kenya

This study sought to examine the effect of interest rates on domestic private sector debt in Kenya over the 30 year period from 1990 to 2019. The dependent variable was private sector domestic debt, the independent variable was commercial bank weighted average lending rate while the control variables were annual GDP growth, extended broad money (M3) and annual USD-KES exchange rate. Using the Prais-Winstein estimator model, the regression model findings were commercial bank lending rate had an insignificant relationship with domestic debt at 95% confidence level but significant at 90% level while money supply had a negative and significant relationship with domestic debt. The study noted predominance of the banking sector in the financial sector and identified the need of a well-developed corporate debt market.

The Determinants of Inflation in Ethiopia: A Multivariate Time Series Analysis

Inflation is a continuous increase in the general price level in an economy and falling of purchasing power of the monetary unit. In Ethiopia inflation was not generally an issue before the year 2003/04. Different studies point out their own reasons for the dynamics of inflation of the state. Generally, the aim of this paper to identifying the major sources of inflation. The study observed CPI and its components annually from 1970 to 2011. To identify the major sources of inflation in Ethiopia, the study presented, a VAR, co-integration analysis and the VECM allied with the descriptive analysis. The result of the VECM showed, only budget deficit as percentage of GDP is positively determining inflation of Ethiopia in the short run. In the short run the Broad Money Supply, Real GDP, the imported inflation of international petroleum price and the nominal exchange rate has insignificant effect of the annual Ethiopia’s price hike. In the long run, the Ethiopia’s inflation mainly driven by the Broad Money supply , the Real GDP, interest rate, the Nominal Exchange Rate, and the budget deficit with high significance level. The Broad Money Supply in the economy and the Banks and Financial institutions average lending rate has a positive long run effect on inflation. While, the Rainfall, the deficit budget and the Nominal Exchange rate has a negative long run determination of the price level in Ethiopia. Therefore, the government should follow planned government expenditure and by allowing the Banks and financial institutions lending rate determination should hold on the hand of the market rather than the government to curb inflation in Ethiopia. Keywords: VECM , Inflation, Ethiopia DOI: 10.7176/JESD/11-21-06 Publication date: November 30 th 2020

Determinants of Bank Lending Interest Rates in Tanzania

The study seeks to examine the determinants of bank lending interest rates in Tanzania, largely focusing on identifying the key determinants and their relative importance. Techniques employed comprise interest rates decomposition and econometric estimation using banks’ annual balance sheet data. Results on interest rates decomposition suggest that, the main drivers of lending rates are operating costs, non-performing loans; and costs of funds (deposits interest rates). The three factors accounted for 70.4 percent of small banks’ average lending rates in 2014-17; while for medium and large banks, they constituted about 69.5 percent and 67.4 percent of the lending rates, respectively. Statutory minimum requirement ratio (SMR) appears to play an important role in all banks’ lending rates, but its share has been declining overtime consistent with the expansionary monetary policy measures pursued since 2014. With respect to econometric estimations, the findings confirm the role of operating costs, non-performing loans, and cost of funds in explaining bank lending rates dynamics. Operating costs, cost of funds, and inflation have a statistically significant positive effect on bank lending rates, while bank size and level of liquidity have a negative influence. SMR ratio is statistically significant but bears a negative sign except for locally owned banks. In relative importance, the main determinants of bank lending rates could be ranked as follows: inflation with an average positive impact of 0.432 on lending rates for a unit change in inflation, trailed by operating costs (0.261), and cost of funds (0.255). Bank size has the largest negative effect of 0.288 for every unit increase in the variable. The implication of the findings is that effort should be directed at improving operational efficiency aiming at reducing banks operating costs. The key areas of attention are with respect to employees’ salaries and benefits, as well as rental and depreciation expenses related to premises and equipment. Banks may consider to take advantage of ICT advancement in the country to cut on costs of “mortal and brick” and employees. Priority could be put on utilizing the growing agent banking framework, and digital banking technology. Prudent consolidation of small banks could as well help cut on operating costs, improve efficiency, and enhance liquidity levels. Measures need to be taken to reduce non-performing loans including through enhancing borrowers screening mechanisms enabled by credit risk management frameworks at bank level and mandatory use of credit reference system to reduce credit risk. Strengthening of the regulatory and supervisory role is important mostly targeting to ensure adequate liquidity in the banking system for daily needs. It is recommended to cautiously reduce SMR so as to enhance banks’ lending capacity.

How Effective is Monetary Policy in the Presence of High Informality in Nigeria

This study investigates whether the existence of high informality in Nigeria dampens effective transmission of monetary policy variation to retail rates. Using time series data from 1981-2018, the study adopts ARDL model to estimate both the long and short-run impacts of a high informal economy on the effectiveness of monetary policy. Findings reveal that changes in monetary policy rate has a significant positive impact on retail rates and that, without accounting for informality in the long-run, the transmission of monetary policy to commercial banks' average lending rate is about 95 percent. In addition, the study finds that, in the long-run, informality dampens the effectiveness of monetary policy in Nigeria through the interest rate channel by at least 72 percentage points. The authors, therefore, conclude that high presence of informality in Nigeria dampens the effectiveness of the monetary policy and that the size of the informal economy and commercial bank lending rate are positively related.

Determinants of the Size of Private Sector Credit Disbursement in Ghana

The paper examines the antecedence of the size of private sector credit disbursement in Ghana using symmetric and asymmetric ARDL processes. We find that the treasury bill rates have both a direct and an indirect impact on the amount of credit channelled to the private sector with positive shocks dominating the stimulating effect of the treasury bill rate. Similarly, negative shocks in the average lending rates have a detrimental effect on the credit to the private sector which supports the view that banks use interest rates to ration credit. Also, the saving rates have a direct and indirect effect on private sector credit but positive shocks in the savings rate have a detrimental effect on the amount of credit to the private sector. Moreover, we found a dominance positive effect of the shocks in foreign currency deposits on private sector credit disbursement. Finally, a rise in crude oil prices induces private sector allocation in Ghana even though the effect of oil prices on credit appears mixed.

Non-performing Loan and its Effects on Banking Stability: Evidence from National and International Licensed Banks in Nigeria

This study examines Non-Performing Loan (NPL) and its effects on the stability of Nigerian banks with national and international operational licenses from 2014:Q2 to 2017:Q2. A "restricted" dynamic GMM is employed to estimate the macroeconomic and bank specific drivers of NPL for each licensed category. Z-Score is constructed to proxy banking stability, and its response to shocks NPLs is examined in a panel vector autoregressive framework. The results reveal that drivers of NPLs vary across the two categories of banks, but, weighted average lending rate is a vital macroeconomic driver of NPLs for both. The results also confirm the moral hazard hypothesis and risk-return tradeoff of efficient market theory. Furthermore, international banks withstand NPLs shocks in the long run, despite temporary flux in the short horizon, while the stability of national banks is susceptible to NPLs shocks in the long run. The study recommends that weighted average lending rate, anchored on monetary policy rate should be the focus of banks' regulators when addressing issues of NPLs. Again, strategies for mitigating short run impacts of NPLs on the stability of international licensed banks should be incorporated in the offsite regulatory framework to ensure banking stability.

Dynamic relation between Islamic and conventional lending rates in Malaysia

Conceptually, the Islamic and conventional banking rates are supposedly determined based on different premises, and empirical evidence appears to suggest that they are closely related. However, the findings are not unanimous. This paper offers Malaysian evidence of the extent of relatedness between Islamic and conventional lending rates in a dual-banking system. Our data consists of two pairs of Islamic and conventional lending rates: the base lending rates and the average lending rates. To test the relation, we use the standard methodologies of the Johansen cointegration, Granger causality, variance decomposition, and impulse response function. Our results indicate that there is no long-run relation between the Islamic and conventional lending rates for base lending rates; however, the average lending rates do indicate a cointegration between them. In the short-run the averages are independent. In general it may be concluded that Islamic borrowing may be considered a viable alternative to conventional bank borrowing.