Title :	Impact of interest rate spread on financial performance of Nepalese commercial banks
Material Type:	printed text
Authors:	Bidur Koirala, Author
Publication Date:	2018
Pagination:	113p.
Size:	GRP/Thesis
Accompanying material:	10/B
Languages :	English
Descriptors:	Interest rate
Class number:	332.820
Abstract:	Interest rate spread is the price which borrowers pay for the use of money they borrow from a lender/financial institution. Interest rate is a macroeconomic variable that banking industry uses for effective resource allocation in an economy. This however is made possible through the intermediation role played by these financial intermediaries in the economy. Interest rates operate through their influence on the cost of capital to the investor, as well as on returns to various groups of savers. Crowley (2007)found that interest rate is one of the most important factors that affect the bank financial performance. Spread is defined by market microstructure characteristics of the banking sector and the policy environment. Risk-averse banks operate with smaller spread than risk-neutral banks since risk aversion raises the bank’s optimal interest rate and reduces the amount of credit supplied (Brock & Rojas, 2000).Spread is different from the rates because they are determined by the individual financial institution. Low rate or small spread helps the financial institution to remain competitive hence encouraged.It is notedthat the pricing strategy adopted by the institutions affects their performance greatly hence making it necessary for them to set competitive spread on the borrowed money (Frenkel, 2010). The major objective of this study is to identify the impact of interest rate spread on financial performance of Nepalese commercial bank. The specific objectives of the study are to analyze the structure and pattern of firm size, provision for loan loss, leverage, liquidity, regulated saving deposit rate, GDP and inflation and interest rate spreadof Nepalese commercial banks, to determine the relationship betweenfirm size, provision for loan loss, leverage, liquidity, regulated saving deposit rate, GDP, inflation , interest rate spreadand financial performance of Nepalese commercial banks, to examine the impact of firm size, provision for loan loss, leverage, liquidity, regulated saving deposit rate, GDP, inflation, interest rate spread on banks profitability of Nepalese commercial banks and to identify the most significant factor determining interest rate spread of Nepalese commercial banks. In order to achieve the objectives, secondary data collection was performed from 23 commercial banks in Nepal from 2011/12 to 2015/16, leading to a total of 115 observations.The main sources of data include annual report of selected commercial banks, Central Bureau of Statistics of Nepal and Banking and Financial Statistics published by Nepal Rastra Bank. The study concludes that operating efficiency followed by provision for loan loss, liquidity interest rate spread and growth in GDP are the most dominant factors that influence the return on assets in the context of Nepalese commercial banks. Similarly, the study also concludes that the most influencing factor for determining net interest margin is interest rate spread followed by operating efficiency, regulated saving deposit rate and bank size in the context of Nepalese commercial banks. Using correlation matrix the study reveals that firm size and interest rate spread are positively related to return on assets. Similarly, operating efficiency,GDP, loan loss provision, inflation,regulated saving depositare positively related to return on assets. However, the leverage ratio and liquidity has negative relationship with return on assets.The resultalso shows that firm size,GDP and inflation is positively correlated to net interest margin. On the other hand, the interest rate spread, operating efficiency,liquidity and regulated saving deposit has positive relationship with net interest margin. However, the leverage ratio and loan loss provision has negative relationship with net interest margin. The regression result shows that beta coefficientsfor firm size, interest rate spread and loan loss provision are positive with return on assets. It indicates that there is a positive impact of firm size, loan loss provision and interest rate spread on return on assets. Likewise, the result also shows that the beta coefficients for operating efficiency,gross domestic product, inflation and regulated saving deposit rateare positive with return on assets. It reveals that operating efficiency, GDP, inflation and regulated saving deposit rate has a positive impact on return on assets. Likewise, the result shows that beta coefficient for leverage and liquidity ratioare negative with return on assets. It reveals that leverage ratio and liquidity ratio has a negative impact on return on assets. Likewise, beta coefficients for firm size, operating efficiency and interest rate spread are positive with net interest margin. It reveals that firm size, operating efficiency and interest rate spread has a positive impact on net interest margin. Likewise, the result also shows that the beta coefficients for leverage ratio and loan loss provision are negative with net interest margin. It reveals that leverage ratio and loan loss provision has a negative impact on net interest margin. Similarly, the beta coefficients for regulated saving deposit rate, liquidity, GDP and inflation are positive with net interest margin. It indicates that regulated saving deposit rate, liquidity, GDP and inflation has a positive impact on net interest margin.

Impact of interest rate spread on financial performance of Nepalese commercial banks [printed text] / Bidur Koirala, Author . - 2018 . - 113p. ; GRP/Thesis + 10/B.
Languages : English

Descriptors:	Interest rate
Class number:	332.820
Abstract:	Interest rate spread is the price which borrowers pay for the use of money they borrow from a lender/financial institution. Interest rate is a macroeconomic variable that banking industry uses for effective resource allocation in an economy. This however is made possible through the intermediation role played by these financial intermediaries in the economy. Interest rates operate through their influence on the cost of capital to the investor, as well as on returns to various groups of savers. Crowley (2007)found that interest rate is one of the most important factors that affect the bank financial performance. Spread is defined by market microstructure characteristics of the banking sector and the policy environment. Risk-averse banks operate with smaller spread than risk-neutral banks since risk aversion raises the bank’s optimal interest rate and reduces the amount of credit supplied (Brock & Rojas, 2000).Spread is different from the rates because they are determined by the individual financial institution. Low rate or small spread helps the financial institution to remain competitive hence encouraged.It is notedthat the pricing strategy adopted by the institutions affects their performance greatly hence making it necessary for them to set competitive spread on the borrowed money (Frenkel, 2010). The major objective of this study is to identify the impact of interest rate spread on financial performance of Nepalese commercial bank. The specific objectives of the study are to analyze the structure and pattern of firm size, provision for loan loss, leverage, liquidity, regulated saving deposit rate, GDP and inflation and interest rate spreadof Nepalese commercial banks, to determine the relationship betweenfirm size, provision for loan loss, leverage, liquidity, regulated saving deposit rate, GDP, inflation , interest rate spreadand financial performance of Nepalese commercial banks, to examine the impact of firm size, provision for loan loss, leverage, liquidity, regulated saving deposit rate, GDP, inflation, interest rate spread on banks profitability of Nepalese commercial banks and to identify the most significant factor determining interest rate spread of Nepalese commercial banks. In order to achieve the objectives, secondary data collection was performed from 23 commercial banks in Nepal from 2011/12 to 2015/16, leading to a total of 115 observations.The main sources of data include annual report of selected commercial banks, Central Bureau of Statistics of Nepal and Banking and Financial Statistics published by Nepal Rastra Bank. The study concludes that operating efficiency followed by provision for loan loss, liquidity interest rate spread and growth in GDP are the most dominant factors that influence the return on assets in the context of Nepalese commercial banks. Similarly, the study also concludes that the most influencing factor for determining net interest margin is interest rate spread followed by operating efficiency, regulated saving deposit rate and bank size in the context of Nepalese commercial banks. Using correlation matrix the study reveals that firm size and interest rate spread are positively related to return on assets. Similarly, operating efficiency,GDP, loan loss provision, inflation,regulated saving depositare positively related to return on assets. However, the leverage ratio and liquidity has negative relationship with return on assets.The resultalso shows that firm size,GDP and inflation is positively correlated to net interest margin. On the other hand, the interest rate spread, operating efficiency,liquidity and regulated saving deposit has positive relationship with net interest margin. However, the leverage ratio and loan loss provision has negative relationship with net interest margin. The regression result shows that beta coefficientsfor firm size, interest rate spread and loan loss provision are positive with return on assets. It indicates that there is a positive impact of firm size, loan loss provision and interest rate spread on return on assets. Likewise, the result also shows that the beta coefficients for operating efficiency,gross domestic product, inflation and regulated saving deposit rateare positive with return on assets. It reveals that operating efficiency, GDP, inflation and regulated saving deposit rate has a positive impact on return on assets. Likewise, the result shows that beta coefficient for leverage and liquidity ratioare negative with return on assets. It reveals that leverage ratio and liquidity ratio has a negative impact on return on assets. Likewise, beta coefficients for firm size, operating efficiency and interest rate spread are positive with net interest margin. It reveals that firm size, operating efficiency and interest rate spread has a positive impact on net interest margin. Likewise, the result also shows that the beta coefficients for leverage ratio and loan loss provision are negative with net interest margin. It reveals that leverage ratio and loan loss provision has a negative impact on net interest margin. Similarly, the beta coefficients for regulated saving deposit rate, liquidity, GDP and inflation are positive with net interest margin. It indicates that regulated saving deposit rate, liquidity, GDP and inflation has a positive impact on net interest margin.