| Title : | The impact of net interest margin, market power and diversification strategy on banking stability of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Samjhana Giri, Author | | Publication Date: | 2017 | | Languages : | English | | Descriptors: | Banks
Banks and banking
Economic development
Interest
| | Class number: | 330 | | Abstract: | The banking industry plays a major role in the business of financial intermediation
and has grown over the years with the diversity and complexity of its operations.
Financial stability is a system that can be characterized as stability in the absence of
excessive volatility and stress or crises. In others words, it can be defined as a
condition in which the financial system- comprising financial intermediaries, markets
and market infrastructure -is capable of withstanding shocks and the unraveling of
financial imbalances. It therefore mitigates the likelihood of disruptions in the
financial intermediation process which are severe enough to significantly impair the
allocation of savings to profitable investment.
This study attempts to examine the impact of net interest margin, market power and
diversification strategy on banking stability of Nepalese commercial banks. The
study is based on secondary data of 20 commercial banks with 140 observations for
the period of 2009/10 to 2015/16. The data are collected from the Banking and
Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin
published by Nepal Rastra Bank and annual reports of selected commercial banks.
The regression models are estimated to test the significance and importance of net
interest margin, market power, diversification, and banking stability of Nepalese
commercial banks.
The result shows that average Z-score of return on assets is highest for SCBL (7.701)
and lowest for MBL (1.339), Z-score of return on equity is highest for NABIL (8.542)
and lowest for MBL (1.197), net interest margin is highest for ADBL (6.12 percent)
and lowest for NSBI (2.56 percent), average Herfindahl-Hirschman Index (HHI) of
market power and bank concentration ratio is same for all commercial bank (0.033
and 0.018 respectively), average noninterest income is highest for NABIL (Rs. 1.091
billion) and lowest for NCC (Rs. 0.18 billion), average Herfindahl-Hirschman Index–
HHI for business sector loan portfolio is highest for NSBI (0.59) and lowest for NMB
(0.33), average total assets is highest for NABIL (Rs. 83.30 billion) and lowest for
NCC (Rs. 22.72 billion), average loan to total assets ratio is highest for SIBL (Rs.
71.28 Billion) and lowest for SCBL (45.43 percent).
viii
The descriptive statistics for selected commercial bank shows that that Z-score of
return on assets ranges from a minimum of 1.32 to a maximum of 7.76 leading to an
average of 4.35. The average Z-score of return on equity of selected banks during the
study period is noticed to be 4.17 with a minimum of 1.20 and a maximum of 8.54.
The correlation matrix shows that there is a positive relationship of net interest
margin with banking stability (ZROA and ZROE). This indicates higher the net interest
margin, higher would be the banking stability. The result also shows that loan
concentration ratio (diversification), HHISFOC, is negatively related to the banking
stability (ZROA and ZROE). This indicates that higher the concentration of loans (less
diversified), lower would be the banking stability. The concentration ratios of
Nepalese banking industry (HHITA and CR3) are found to be positively related to the
ZROA and ZROE. Similarly, the result shows that total assets of the bank is positively
related to the banking stability (ZROA and ZROE). This indicates that higher the total
assets, higher would be the banking stability. However, the correlation matrix shows
that loan to total assets is negatively related to the banking stability (ZROA and ZROE).
It indicates that the more the total assets of a bank are occupied by loans or thelesser
the diversification, the lower would be the banking stability.
The regression analysis shows that there is a positive relationship between net
interest margin and banking stability(Z-score). It indicates that higher the net interest
margin, higher would be the banking stability. However, the study shows that loan
concentration ratio (HHISFOC) has a negative relationship with banking stability. It
indicates that higher the concentration of loan to a single sector (or lower the
diversification of loan), lower would be the banking stability (Z-score). Similarly, the
results show that diversification in terms of non-interest income is positively related
to the banking stability (ZROA). It indicates that higher the non-interest income,
higher would be the banking stability (ZROA). Likewise, the results show that market
power in terms of HHIloan and three bank concentration ratio (CR3) has a positive
relationship with banking stability (ZROE). This indicates that higher the
concentration ratio, higher would be the banking stability (ZROE).
Similarly, results show that control variables, total assets and loan to total assets,
show mixed results with banking stability. The result shows that total assets are
positively related to the banking stability. This indicates that larger the bank in terms
ix
of total assets, higher would be the banking stability. However, the results show that
loan to total assets ratio shows negative relationship with banking stability. The
regression results also show that beta coefficients are positive for concentration ratio
and total assets. However, the coefficients are negative for loan concentration ratio
(HHISFOC). Yet, the coefficients are significant only for loan concentration ratio and
total assets. Thus, the study concludes that loan diversification and total assets are
the major factors affecting banking stability of Nepalese commercial banks. |
The impact of net interest margin, market power and diversification strategy on banking stability of Nepalese commercial banks [printed text] / Samjhana Giri, Author . - 2017. Languages : English | Descriptors: | Banks
Banks and banking
Economic development
Interest
| | Class number: | 330 | | Abstract: | The banking industry plays a major role in the business of financial intermediation
and has grown over the years with the diversity and complexity of its operations.
Financial stability is a system that can be characterized as stability in the absence of
excessive volatility and stress or crises. In others words, it can be defined as a
condition in which the financial system- comprising financial intermediaries, markets
and market infrastructure -is capable of withstanding shocks and the unraveling of
financial imbalances. It therefore mitigates the likelihood of disruptions in the
financial intermediation process which are severe enough to significantly impair the
allocation of savings to profitable investment.
This study attempts to examine the impact of net interest margin, market power and
diversification strategy on banking stability of Nepalese commercial banks. The
study is based on secondary data of 20 commercial banks with 140 observations for
the period of 2009/10 to 2015/16. The data are collected from the Banking and
Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin
published by Nepal Rastra Bank and annual reports of selected commercial banks.
The regression models are estimated to test the significance and importance of net
interest margin, market power, diversification, and banking stability of Nepalese
commercial banks.
The result shows that average Z-score of return on assets is highest for SCBL (7.701)
and lowest for MBL (1.339), Z-score of return on equity is highest for NABIL (8.542)
and lowest for MBL (1.197), net interest margin is highest for ADBL (6.12 percent)
and lowest for NSBI (2.56 percent), average Herfindahl-Hirschman Index (HHI) of
market power and bank concentration ratio is same for all commercial bank (0.033
and 0.018 respectively), average noninterest income is highest for NABIL (Rs. 1.091
billion) and lowest for NCC (Rs. 0.18 billion), average Herfindahl-Hirschman Index–
HHI for business sector loan portfolio is highest for NSBI (0.59) and lowest for NMB
(0.33), average total assets is highest for NABIL (Rs. 83.30 billion) and lowest for
NCC (Rs. 22.72 billion), average loan to total assets ratio is highest for SIBL (Rs.
71.28 Billion) and lowest for SCBL (45.43 percent).
viii
The descriptive statistics for selected commercial bank shows that that Z-score of
return on assets ranges from a minimum of 1.32 to a maximum of 7.76 leading to an
average of 4.35. The average Z-score of return on equity of selected banks during the
study period is noticed to be 4.17 with a minimum of 1.20 and a maximum of 8.54.
The correlation matrix shows that there is a positive relationship of net interest
margin with banking stability (ZROA and ZROE). This indicates higher the net interest
margin, higher would be the banking stability. The result also shows that loan
concentration ratio (diversification), HHISFOC, is negatively related to the banking
stability (ZROA and ZROE). This indicates that higher the concentration of loans (less
diversified), lower would be the banking stability. The concentration ratios of
Nepalese banking industry (HHITA and CR3) are found to be positively related to the
ZROA and ZROE. Similarly, the result shows that total assets of the bank is positively
related to the banking stability (ZROA and ZROE). This indicates that higher the total
assets, higher would be the banking stability. However, the correlation matrix shows
that loan to total assets is negatively related to the banking stability (ZROA and ZROE).
It indicates that the more the total assets of a bank are occupied by loans or thelesser
the diversification, the lower would be the banking stability.
The regression analysis shows that there is a positive relationship between net
interest margin and banking stability(Z-score). It indicates that higher the net interest
margin, higher would be the banking stability. However, the study shows that loan
concentration ratio (HHISFOC) has a negative relationship with banking stability. It
indicates that higher the concentration of loan to a single sector (or lower the
diversification of loan), lower would be the banking stability (Z-score). Similarly, the
results show that diversification in terms of non-interest income is positively related
to the banking stability (ZROA). It indicates that higher the non-interest income,
higher would be the banking stability (ZROA). Likewise, the results show that market
power in terms of HHIloan and three bank concentration ratio (CR3) has a positive
relationship with banking stability (ZROE). This indicates that higher the
concentration ratio, higher would be the banking stability (ZROE).
Similarly, results show that control variables, total assets and loan to total assets,
show mixed results with banking stability. The result shows that total assets are
positively related to the banking stability. This indicates that larger the bank in terms
ix
of total assets, higher would be the banking stability. However, the results show that
loan to total assets ratio shows negative relationship with banking stability. The
regression results also show that beta coefficients are positive for concentration ratio
and total assets. However, the coefficients are negative for loan concentration ratio
(HHISFOC). Yet, the coefficients are significant only for loan concentration ratio and
total assets. Thus, the study concludes that loan diversification and total assets are
the major factors affecting banking stability of Nepalese commercial banks. |
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