| Title : | Determinants of interest rate spread of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Arjun Paudel, Author | | Publication Date: | 2017 | | Pagination: | 103p. | | Size: | GRP/Thesis | | Accompanying material: | 9/B | | Languages : | English | | Class number: | 330 | | Abstract: | The interest rate determination is amongst the major issues in business firms. The relationship between interest rate movements and banks profitability has been the focus of a considerable amount in recent years. Interest rate as a price of money reflects market information regarding expected change in the purchasing power of money or future inflation (Ngugi, 2001). Interest rate can be decomposed into different components. 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 and to depict the implications of interest rate on cash flow. The interest rate is predominantly influenced by the dual forces of supply and demand for credit (Sufian and Chong, 2008). When the supply of credit from lenders rises in comparison to the demand from borrowers, interest rate tends to come down. With a spurt in spending and investment avenues, the demand rises relative to the supply.
This study has been conducted to is to assess the determinants of interest rate spread of Nepalese commercial banks. More specifically, it examines the impact of capital adequacy ratio, liquidity ratio, firm size, deposit, non-performing loans and inflation rate on interest rate spread and net interest margin of the Nepalese commercial banks for the period of 6 years from 2010 to 2015. The data were gathered for 20 commercial banks in Nepal. The main sources of data include Banking and Financial Statistics and Supervision Report published by Nepal Rastra Bank and annual reports of the selected commercial banks. The study is based on secondary data. The relationship between dependent and independent variables are analyzed in single step and multi-step regression analysis. The variables used in the study are capital adequacy ratio, firm size, liquidity ratio, deposits, non-performing loans and inflation.
The study reveals that the capital adequacy ratio is negatively correlated to interest rate spread of Nepalese commercial banks. It indicates that increase in the capital adequacy ratio leads to decrease in interest rate spread. The results also show that firm size is positively correlated to interest rate spread and net interest margin of Nepalese commercial banks indicating that increase in the firm size leads to increase in the IRS and NIM. However, the deposits are negatively correlated to net interest margin. It indicates that increase in the deposits leads to decrease in the NIM. Similarly, non-performing loans is positively correlated with interest rate spread and net interest margin of Nepalese commercial banks indicating that increase in non-performing loans leads to increase in IRS and NIM. The results of the regression analysis show that capital adequacy ratio of the banks has significant negative relationship with interest rate spread of Nepalese commercial banks. Similarly, liquidity ratio has significant negative relationship with the interest rate spread and net interest margin. However, beta coefficient is positive for firm size and non-performing loan with interest rate spread and net interest margin of Nepalese commercial banks.
The study concluded that the capital adequacy ratio of the banks has significant negative relationship with interest rate spread of Nepalese commercial banks indicating higher the capital adequacy ratio, lower would be the interest rate spread. Similarly, liquidity ratio has significant negative relationship with the interest rate spread which also indicates that higher the liquidity ratio lower would be interest rate spread. But firm size and non-performing loan of the bank have positive relationship with interest spread of the banks. The study further concludes that liquidity ratio has significant negative impact with net interest margin of banks of Nepal. Similarly, the study also concludes that firm size and non-performing loan have significant positive impact on the net interest margin.
Banks are recommended to focus on increasing the non-performing loan to increase the interest rate spread as result indicates the positive relationship between non-performing loans with interest rate spread. Since the result showed a negative relationship of the capital adequacy ratio and liquidity with interest rate spread, commercial banks willing to increase the interest rate spread should decrease the capital adequacy ratio and liquidity ratio. The study suggests that commercial banks should focus to increase the firm size to increase the net interest margin as result indicates the positive relationship between firm sizes with net interest margin. It is suggested that commercial banks willing to increase the net interest margin should increase the non-performing loans of the commercial banks. However, commercial banks willing to increase the net interest margin should decrease the liquidity.
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Determinants of interest rate spread of Nepalese commercial banks [printed text] / Arjun Paudel, Author . - 2017 . - 103p. ; GRP/Thesis + 9/B. Languages : English | Class number: | 330 | | Abstract: | The interest rate determination is amongst the major issues in business firms. The relationship between interest rate movements and banks profitability has been the focus of a considerable amount in recent years. Interest rate as a price of money reflects market information regarding expected change in the purchasing power of money or future inflation (Ngugi, 2001). Interest rate can be decomposed into different components. 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 and to depict the implications of interest rate on cash flow. The interest rate is predominantly influenced by the dual forces of supply and demand for credit (Sufian and Chong, 2008). When the supply of credit from lenders rises in comparison to the demand from borrowers, interest rate tends to come down. With a spurt in spending and investment avenues, the demand rises relative to the supply.
This study has been conducted to is to assess the determinants of interest rate spread of Nepalese commercial banks. More specifically, it examines the impact of capital adequacy ratio, liquidity ratio, firm size, deposit, non-performing loans and inflation rate on interest rate spread and net interest margin of the Nepalese commercial banks for the period of 6 years from 2010 to 2015. The data were gathered for 20 commercial banks in Nepal. The main sources of data include Banking and Financial Statistics and Supervision Report published by Nepal Rastra Bank and annual reports of the selected commercial banks. The study is based on secondary data. The relationship between dependent and independent variables are analyzed in single step and multi-step regression analysis. The variables used in the study are capital adequacy ratio, firm size, liquidity ratio, deposits, non-performing loans and inflation.
The study reveals that the capital adequacy ratio is negatively correlated to interest rate spread of Nepalese commercial banks. It indicates that increase in the capital adequacy ratio leads to decrease in interest rate spread. The results also show that firm size is positively correlated to interest rate spread and net interest margin of Nepalese commercial banks indicating that increase in the firm size leads to increase in the IRS and NIM. However, the deposits are negatively correlated to net interest margin. It indicates that increase in the deposits leads to decrease in the NIM. Similarly, non-performing loans is positively correlated with interest rate spread and net interest margin of Nepalese commercial banks indicating that increase in non-performing loans leads to increase in IRS and NIM. The results of the regression analysis show that capital adequacy ratio of the banks has significant negative relationship with interest rate spread of Nepalese commercial banks. Similarly, liquidity ratio has significant negative relationship with the interest rate spread and net interest margin. However, beta coefficient is positive for firm size and non-performing loan with interest rate spread and net interest margin of Nepalese commercial banks.
The study concluded that the capital adequacy ratio of the banks has significant negative relationship with interest rate spread of Nepalese commercial banks indicating higher the capital adequacy ratio, lower would be the interest rate spread. Similarly, liquidity ratio has significant negative relationship with the interest rate spread which also indicates that higher the liquidity ratio lower would be interest rate spread. But firm size and non-performing loan of the bank have positive relationship with interest spread of the banks. The study further concludes that liquidity ratio has significant negative impact with net interest margin of banks of Nepal. Similarly, the study also concludes that firm size and non-performing loan have significant positive impact on the net interest margin.
Banks are recommended to focus on increasing the non-performing loan to increase the interest rate spread as result indicates the positive relationship between non-performing loans with interest rate spread. Since the result showed a negative relationship of the capital adequacy ratio and liquidity with interest rate spread, commercial banks willing to increase the interest rate spread should decrease the capital adequacy ratio and liquidity ratio. The study suggests that commercial banks should focus to increase the firm size to increase the net interest margin as result indicates the positive relationship between firm sizes with net interest margin. It is suggested that commercial banks willing to increase the net interest margin should increase the non-performing loans of the commercial banks. However, commercial banks willing to increase the net interest margin should decrease the liquidity.
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