| Title : | Impact of market interest rate fluctuations on profitability of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Komal Rauniyar, Author | | Publication Date: | 2016 | | Pagination: | 94p. | | Size: | GRP/Thesis | | Accompanying material: | 8/B | | Languages : | English | | Descriptors: | Market interest rate
| | Class number: | 332.809 | | Abstract: | Interest rates measure the price paid by a borrower or debtor to a lender or creditor for the use of resources during some time intervals(Fabozzi and Modigliani, 2003).Husni and Khrawish (2011) described that to measure the effect of changes in bank’s profitability, it is mandatory to evaluate and asses the overall fluctuations of interest rate on the economy.Interest rate risk, which is caused by unexpected and unfavorable changes in interest rates, is a major contributor to the increased volatility that accompanies globalization.Devinaga (2010) advocated that interest rate have been captured in most studies as a determinant of profitability of commercial banks because interest rate risk has enormous impact on banks profitability.
Ologunde et al. (2006)described the impact of interest rate on banks profitability and provided important implications for monetary policy, risk-returns analysis, financial securities valuation and government policy towards financial markets. The study found that interest rate is one of the important macroeconomic variables which is closely related to economic growth in the country.Fraff et al.(2004) investigated the dual impact of changes in interest rate and interest rate volatility and found that the deregulation has changed the fundamental relationship between interest rate and large bank returns from positive in the pre-deregulation period to negative in the post-deregulation period.
Schranz (1993), found that net interest margin associated with banks’ portfolios is the most sensitive to interest-rate changes. Hasan and Hunter (1996) mentioned that interest is the main factor in fund management activities of commercial banks.Goddard et al. (2004) found that there is negative relationship between capital adequacy ratio and bank performance. The study revealed that higher capital adequacy is an indication that banks are operating over-cautiously and are not willing to grasp on to potential profitable opportunities. However, Pasiouras and Kosmidou (2007) found positive relationship between capital adequacy ratio and bank profitability. The study implied that highly capitalized banks need lower external funds which are costly and are able to attain higher profitability.
The main objective of this study is to investigate the impact of market interest rates fluctuations on the profitability of Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 140 observations for the period of 2008/09 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The research design adopted in this study is descriptive and causal comparative research design as it deals withanalyzing the impact of market interest rates fluctuations on the profitability of commercial banks.
The result shows that average return on assets is highest for NB (5.31 percent), average return on equity is also highest for NB (45.66 percent) and average net interest margin is highest for ADBL (5.23 percent). Similarly, the average deposit rate is highest for SBL (7.49 percent), average liquidity ratio is highest for NCC (47.2 times), average capital adequacy ratio is highest for LBL (20.21 percent), weighted average treasury bill rate for the country is highest in year 2011 (8.35 percent), weighted average reverse repo rate for the country is highest in year 2010 (3.55 percent), GDP rate for the country is high in year 2014 (5.4 percent) and inflation rate for the country is high in year 2009 (11.1 percent).
The descriptive statistics shows that return on assets varies from -1.04 percent to 18.04 percent, leading to the average return on assets to 1.83 percent. Return on equity ranges from -35.34 percent to 194.03 percent, leading to the average return on equity to 18.19 percent. Net interest margin varies from 0.56 percent to 6.24 percent, leading to the average net interest margin to 3.24 percent.The average deposit rate ranges from 1.63 percent to 9.12 percent, leading to the average deposit rate of 5.80 percent. Liquidity ratio varies from 2.09 times to 87.25 times, leading to the average liquidity ratio to10.78 times. Capital adequacy ratio ranges from 5.55 percent to 24.62 percent with average value of 12.62 percent.The average treasury bill rate varies from 0.76 percent to 8.35 percent, leading to the average treasury bill rate to 4.20 percent. Similarly, reverse repo rate ranges from 0.03 percent to 3.55 percent with average value of 1.22 percent.The average GDP rate varies from 3.4 percent to 4.82 percent, leading to the average GDP rate to 4.26 percent. Similarly, inflation rate ranges from 7.2 percent to 11.1 percent with average inflation of 9.26 percent.
The result also shows that capital adequacy ratio, treasury bill rate, reverse repo rate and inflation rate are positively related to return on assets whereas deposit rate, liquidity ratio and GDP are negatively related to return on assets. Similarly,treasury bill rate, reverse repo rate and inflation rate are positively related to return on equity whereas deposit rate, liquidity ratio, capital adequacy ratio and GDP are negatively related to return on equity.Likewise, capital adequacy ratio, treasury bill rate and GDP are positively related to net interest margin whereas deposit rate, liquidity ratio, reverse repo rate and inflation are negatively related to net interest margin.
The regression results show that the beta coefficients for deposit rate, liquidity ratio and GDP are negative with return on assets. However, the beta coefficient for deposit rate is only significant at 5 percent level of significance with ROA. Similarly, the beta coefficients for capital adequacy ratio, treasury bill rate, reverse repo rate and inflation are positive with return on assets. Likewise, the beta coefficients for deposit rate, capital adequacy ratio, liquidity ratio and GDP are negative with return on equity. However, the beta coefficients for deposit rate and capital adequacy ratio are significant at 5 percent level of significance with ROE. Similarly, the beta coefficients for treasury bill rate, reverse repo rate and inflation are positive with return on equity.Likewise, the beta coefficients for deposit rate, liquidity ratio, reverse repo rate and inflation are negative with net interest margin. However, thebeta coefficients for capital adequacy, treasury bill rate, GDP rate are positive with net interest margin.
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Impact of market interest rate fluctuations on profitability of Nepalese commercial banks [printed text] / Komal Rauniyar, Author . - 2016 . - 94p. ; GRP/Thesis + 8/B. Languages : English | Descriptors: | Market interest rate
| | Class number: | 332.809 | | Abstract: | Interest rates measure the price paid by a borrower or debtor to a lender or creditor for the use of resources during some time intervals(Fabozzi and Modigliani, 2003).Husni and Khrawish (2011) described that to measure the effect of changes in bank’s profitability, it is mandatory to evaluate and asses the overall fluctuations of interest rate on the economy.Interest rate risk, which is caused by unexpected and unfavorable changes in interest rates, is a major contributor to the increased volatility that accompanies globalization.Devinaga (2010) advocated that interest rate have been captured in most studies as a determinant of profitability of commercial banks because interest rate risk has enormous impact on banks profitability.
Ologunde et al. (2006)described the impact of interest rate on banks profitability and provided important implications for monetary policy, risk-returns analysis, financial securities valuation and government policy towards financial markets. The study found that interest rate is one of the important macroeconomic variables which is closely related to economic growth in the country.Fraff et al.(2004) investigated the dual impact of changes in interest rate and interest rate volatility and found that the deregulation has changed the fundamental relationship between interest rate and large bank returns from positive in the pre-deregulation period to negative in the post-deregulation period.
Schranz (1993), found that net interest margin associated with banks’ portfolios is the most sensitive to interest-rate changes. Hasan and Hunter (1996) mentioned that interest is the main factor in fund management activities of commercial banks.Goddard et al. (2004) found that there is negative relationship between capital adequacy ratio and bank performance. The study revealed that higher capital adequacy is an indication that banks are operating over-cautiously and are not willing to grasp on to potential profitable opportunities. However, Pasiouras and Kosmidou (2007) found positive relationship between capital adequacy ratio and bank profitability. The study implied that highly capitalized banks need lower external funds which are costly and are able to attain higher profitability.
The main objective of this study is to investigate the impact of market interest rates fluctuations on the profitability of Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 140 observations for the period of 2008/09 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The research design adopted in this study is descriptive and causal comparative research design as it deals withanalyzing the impact of market interest rates fluctuations on the profitability of commercial banks.
The result shows that average return on assets is highest for NB (5.31 percent), average return on equity is also highest for NB (45.66 percent) and average net interest margin is highest for ADBL (5.23 percent). Similarly, the average deposit rate is highest for SBL (7.49 percent), average liquidity ratio is highest for NCC (47.2 times), average capital adequacy ratio is highest for LBL (20.21 percent), weighted average treasury bill rate for the country is highest in year 2011 (8.35 percent), weighted average reverse repo rate for the country is highest in year 2010 (3.55 percent), GDP rate for the country is high in year 2014 (5.4 percent) and inflation rate for the country is high in year 2009 (11.1 percent).
The descriptive statistics shows that return on assets varies from -1.04 percent to 18.04 percent, leading to the average return on assets to 1.83 percent. Return on equity ranges from -35.34 percent to 194.03 percent, leading to the average return on equity to 18.19 percent. Net interest margin varies from 0.56 percent to 6.24 percent, leading to the average net interest margin to 3.24 percent.The average deposit rate ranges from 1.63 percent to 9.12 percent, leading to the average deposit rate of 5.80 percent. Liquidity ratio varies from 2.09 times to 87.25 times, leading to the average liquidity ratio to10.78 times. Capital adequacy ratio ranges from 5.55 percent to 24.62 percent with average value of 12.62 percent.The average treasury bill rate varies from 0.76 percent to 8.35 percent, leading to the average treasury bill rate to 4.20 percent. Similarly, reverse repo rate ranges from 0.03 percent to 3.55 percent with average value of 1.22 percent.The average GDP rate varies from 3.4 percent to 4.82 percent, leading to the average GDP rate to 4.26 percent. Similarly, inflation rate ranges from 7.2 percent to 11.1 percent with average inflation of 9.26 percent.
The result also shows that capital adequacy ratio, treasury bill rate, reverse repo rate and inflation rate are positively related to return on assets whereas deposit rate, liquidity ratio and GDP are negatively related to return on assets. Similarly,treasury bill rate, reverse repo rate and inflation rate are positively related to return on equity whereas deposit rate, liquidity ratio, capital adequacy ratio and GDP are negatively related to return on equity.Likewise, capital adequacy ratio, treasury bill rate and GDP are positively related to net interest margin whereas deposit rate, liquidity ratio, reverse repo rate and inflation are negatively related to net interest margin.
The regression results show that the beta coefficients for deposit rate, liquidity ratio and GDP are negative with return on assets. However, the beta coefficient for deposit rate is only significant at 5 percent level of significance with ROA. Similarly, the beta coefficients for capital adequacy ratio, treasury bill rate, reverse repo rate and inflation are positive with return on assets. Likewise, the beta coefficients for deposit rate, capital adequacy ratio, liquidity ratio and GDP are negative with return on equity. However, the beta coefficients for deposit rate and capital adequacy ratio are significant at 5 percent level of significance with ROE. Similarly, the beta coefficients for treasury bill rate, reverse repo rate and inflation are positive with return on equity.Likewise, the beta coefficients for deposit rate, liquidity ratio, reverse repo rate and inflation are negative with net interest margin. However, thebeta coefficients for capital adequacy, treasury bill rate, GDP rate are positive with net interest margin.
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