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Determinants of interest rate spread of Nepalese commercial banks / Sulochana Devkota

Title : Determinants of interest rate spread of Nepalese commercial banks Material Type: printed text Authors: Sulochana Devkota, Author Publication Date: 2016 Pagination: 89p. Size: GRP/Thesis Accompanying material: 7/B Languages : English Descriptors: Economic policy Class number: 332.82 Abstract: Interest rate spread has always been one of the most important and significant economic issues in different countries of the world. Significant studies have been carried out by banking institutions in order to find out the reason for fluctuations in interest rate and factors affecting interest rate spread. It has been found that level of inflation, the interest rate and deposit are factors affecting the interest rate spread (Nazarian et al. 2010). Banks are the financial institution and financial intermediaries that accept funds from depositors and channel it in lending activities. In this course, bank provide lower interest to depositor and charge higher interest rate to borrower, which create a spread called interest rate spread (Tennant, 2014). The interest spread rate can be high and low in different countries. High interest spread can increase profitability of banks and make capital base stronger. However, high interest spread is indication of banking sector inefficiency also (Beock & Suarez 2000, Nazarian et al. 2010).

This study investigates the determinants of interest rate spread of Nepalese commercial banks. The specific objectives of this study are: a) to determine the impact of bank specific variables on interest rate spread, b) to evaluate the effect of macroeconomic variables on interest rate spread, c) to identify the impact of bank specific and macroeconomic variables on net interest margin, d) to examine the relationship of bank specific and macroeconomic variables with net operating margin of commercial banks in Nepal.

The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the relationship between the different dependent and independent variables of interest rate spread of Nepalese commercial banks. The study is based on secondary data. The variables used in the study are categorized into bank specific variables as capital adequacy ratio, firm size, deposit and non performing loan and macroeconomic variables as inflation, gross domestic product and interest rate. Secondary data were collected from supervision reports of NRB and various annual reports of different commercial banks. This study covers data for 7 years ranging for year 2007/08 to 2013/14. Regression models were estimated to test the significance of the different dependent and independent variables.

The study reveals that there is positive relationship of interest rate spread with deposit, firm size, inflation and gross domestic product. Capital adequacy ratio, non performing loan and interest rate are negatively related with interest rate spread. Similarly, there is positive relationship of net interest margin with the deposit, firm size, inflation and interest rate. However capital adequacy ratio, non- performing loan and gross domestic product are negatively related with the net interest margin. The result also shows that there is positive relationship of net operating margin with capital adequacy ratio, deposit, firm size, inflation and interest rate whereas, non- performing loan and gross domestic product are negatively related with the net operating margin.

The study revealed that deposit has positively significant impact on interest rate spread. Which indicates that banks with higher the deposits have higher percent of interest rate spread. Hence, the banks willing to increase the performance should focus on increasing the deposit. The study observed a positive and significant relationship of firm size with interest rate spread indicating that larger banks are more profitable than smaller banks. Hence, banks are recommended to increase firm size to increase the performance. The study found deposit has positive relation with net operating margin. Thus, the banks should increase the deposit to increase performance of banks. The study observed a negative relationship between non-performing loan and interest rate spread. Hence, the banks willing to higher IRS should lower non-performing loans. There is negative relationship of capital adequacy ratio with interest rate spread. Hence, the banks are suggested increase the performance needs to reduce capital adequacy ratio.

The major conclusion of this study is that the interest rate spread of Nepalese commercial banks is affected by bank specific and macroeconomic factors. Deposit and firm size are an internal factor which holds a definitely significant positive effect on interest rate spread where as capital adequacy ratio and non performing loan are an internal factor which holds significant negative effect on interest rate spread, mean while interest rate is the only external factors that affects on interest rate spread significantly. The higher the deposit, the more capable the commercial bank on paying its obligations. Similarly, deposit and firm size is an internal factor which holds a significant positive effect on net interest margin of commercial banks in Nepal. Larger firm and higher deposits are able to earn stable profitability in term of interest rate spread, net interest margin and net operating margin.

Determinants of interest rate spread of Nepalese commercial banks [printed text] / Sulochana Devkota, Author . - 2016 . - 89p. ; GRP/Thesis + 7/B.

Languages : English

Descriptors: Economic policy Class number: 332.82 Abstract: Interest rate spread has always been one of the most important and significant economic issues in different countries of the world. Significant studies have been carried out by banking institutions in order to find out the reason for fluctuations in interest rate and factors affecting interest rate spread. It has been found that level of inflation, the interest rate and deposit are factors affecting the interest rate spread (Nazarian et al. 2010). Banks are the financial institution and financial intermediaries that accept funds from depositors and channel it in lending activities. In this course, bank provide lower interest to depositor and charge higher interest rate to borrower, which create a spread called interest rate spread (Tennant, 2014). The interest spread rate can be high and low in different countries. High interest spread can increase profitability of banks and make capital base stronger. However, high interest spread is indication of banking sector inefficiency also (Beock & Suarez 2000, Nazarian et al. 2010).

This study investigates the determinants of interest rate spread of Nepalese commercial banks. The specific objectives of this study are: a) to determine the impact of bank specific variables on interest rate spread, b) to evaluate the effect of macroeconomic variables on interest rate spread, c) to identify the impact of bank specific and macroeconomic variables on net interest margin, d) to examine the relationship of bank specific and macroeconomic variables with net operating margin of commercial banks in Nepal.

The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the relationship between the different dependent and independent variables of interest rate spread of Nepalese commercial banks. The study is based on secondary data. The variables used in the study are categorized into bank specific variables as capital adequacy ratio, firm size, deposit and non performing loan and macroeconomic variables as inflation, gross domestic product and interest rate. Secondary data were collected from supervision reports of NRB and various annual reports of different commercial banks. This study covers data for 7 years ranging for year 2007/08 to 2013/14. Regression models were estimated to test the significance of the different dependent and independent variables.

The study reveals that there is positive relationship of interest rate spread with deposit, firm size, inflation and gross domestic product. Capital adequacy ratio, non performing loan and interest rate are negatively related with interest rate spread. Similarly, there is positive relationship of net interest margin with the deposit, firm size, inflation and interest rate. However capital adequacy ratio, non- performing loan and gross domestic product are negatively related with the net interest margin. The result also shows that there is positive relationship of net operating margin with capital adequacy ratio, deposit, firm size, inflation and interest rate whereas, non- performing loan and gross domestic product are negatively related with the net operating margin.

The study revealed that deposit has positively significant impact on interest rate spread. Which indicates that banks with higher the deposits have higher percent of interest rate spread. Hence, the banks willing to increase the performance should focus on increasing the deposit. The study observed a positive and significant relationship of firm size with interest rate spread indicating that larger banks are more profitable than smaller banks. Hence, banks are recommended to increase firm size to increase the performance. The study found deposit has positive relation with net operating margin. Thus, the banks should increase the deposit to increase performance of banks. The study observed a negative relationship between non-performing loan and interest rate spread. Hence, the banks willing to higher IRS should lower non-performing loans. There is negative relationship of capital adequacy ratio with interest rate spread. Hence, the banks are suggested increase the performance needs to reduce capital adequacy ratio.

The major conclusion of this study is that the interest rate spread of Nepalese commercial banks is affected by bank specific and macroeconomic factors. Deposit and firm size are an internal factor which holds a definitely significant positive effect on interest rate spread where as capital adequacy ratio and non performing loan are an internal factor which holds significant negative effect on interest rate spread, mean while interest rate is the only external factors that affects on interest rate spread significantly. The higher the deposit, the more capable the commercial bank on paying its obligations. Similarly, deposit and firm size is an internal factor which holds a significant positive effect on net interest margin of commercial banks in Nepal. Larger firm and higher deposits are able to earn stable profitability in term of interest rate spread, net interest margin and net operating margin.

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Barcode Call number Media type Location Section Status 204/D 332.82 DEV Books Uniglobe Library Social Sciences Available