Determinants of Interest Margin in Pakistan: A Panel Data Analysis
Abstract
:1. Introduction
2. Literature Review
3. Theoretical Model
4. Methodology and Data
Econometric Specification and Estimation Strategy
5. Results and Discussion
6. Conclusions and Policy Recommendations
Author Contributions
Funding
Conflicts of Interest
Appendix A
References
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1 | These factors are mentioned at end of Section 3. |
2 | Basically, the float values “a” and “b” are the interest rate on deposit and loan rate on advances subject to risk free interest rate in the money market, which is the benchmark rate for a bank here. The sum of the float values is the profit of the bank, which is indicated by Equation (2). Here, the objective of a bank is profit maximisation. Therefore, after maximising the objective function of the bank, Equation (7) reveals the profit of the bank. As S = a + b is the profit of the bank, which is equal to the net interest margin (NIM) in our study. Therefore, we did not include float values directly in econometric modelling. |
3 | For example data for the MCB bank is obtained from https://www.mcb.com.pk/investor-relations/interim-reports. The data for other banks is obtained in the same way. |
4 | |
5 | As s *, s **, and s ***, denote 10 percent, 5 percent and 1 percent level of significance, respectively. |
6 | The formula of LI and its procedure of calculation is in Appendix A. |
Dependent Variable | Description | Expected Sign | Mean | S.D |
---|---|---|---|---|
Net Interest margin | Interest earned minus interest payments divided by total assets | 0.021 | 0.014 | |
Independent Variables | ||||
Operating Cost | The ratio of non-interest expenses to total assets | + | 0.018 | 0.013 |
Risk Aversion | The ratio of capital to total assets | + or − | 0.155 | 0.288 |
Credit Risk | Non-performing loans divided by total loans | + | 0.125 | 0.442 |
Operational Size | The logarithm of bank’s total assets | − | 0.775 | 3.983 |
Interest Rate Risk | The difference between the interbank rate and T-bill rate | + | 0.512 | 0.589 |
Managerial Efficiency | The ratio of operating expenses to gross income | − | 0.101 | 2.543 |
Herfindahl Hirschman Index | The sum of squares of market shares of each bank within the banking industry | + | 0.085 | 0.017 |
Lerner Index | the difference between price and marginal cost divided by price | + | 0.251 | 0.342 |
Taxation | tax rate on the profit of a bank | + | 0.056 | 0.105 |
Inflation | Percentage change in CPI | + | 0.022 | 0.018 |
Monet supply | Growth rate of M2 | + | 0.034 | 0.027 |
National Saving | Growth rate of national saving | + | 0.046 | 0.108 |
Treasury Bill Rate | 6 months Treasury bill rate | + | 9.145 | 3.279 |
(1) | (2) | (3) | (4) | |
---|---|---|---|---|
VARIABLES | Fixed Effect | Two Step System GMM | ||
NIM | NIM | NIM | ||
Lagged of the NIM | 0.1151 *** | 0.2557 *** | 0.2894 *** | 0.2573 *** |
(0.0169) | (0.0470) | (0.035 2) | (0.0489) | |
Operating Cost | 0.7725 *** | 0.6145 *** | 0.6370 *** | 0.5829 *** |
(0.0168) | (0.0400) | (0.0387) | (0.0570) | |
Risk Aversion | 0.0004 | 0.0040 | 0.0060 ** | 0.0020 |
(0.0007) | (0.0026) | (0.0026) | (0.0026) | |
Credit Risk | 0.0001 | −0.0080 * | −0.0103 *** | −0.0109 *** |
(0.0005) | (0.0041) | (0.0039) | (0.0032) | |
Operational Size | 0.0000 | −0.0025 *** | −0.0021 *** | −0.0021 *** |
(0.0000) | (0.0007) | (0.0005) | (0.0007) | |
Interest Rate Risk | 0.0005 | 0.0011 ** | 0.0006 | 0.0007 * |
(0.0004) | (0.0004) | (0.0005) | (0.0003) | |
Managerial Efficiency | 0.0000 | −0.0003 | −0.0002 | −0.0004 |
(0.0000) | (0.0004) | (0.007) | (0.0007) | |
Taxation | 0.0212 *** | 0.0515 *** | 0.0510 *** | 0.0527 *** |
(0.0029) | (0.0104) | (0.0075) | (0.0074) | |
Hirfendahl-Index | −0.1033 *** | −0.0992 *** | −0.0593 *** | |
(0.0200) | (0.0332) | (0.0217) | ||
Lerner Index | 0.0181 *** | 0.0058 ** | 0.0069 ** | |
(0.0012) | (0.0029) | (0.0031) | ||
Inflation Rate | 0.0022 | −0.0564 *** | −0.0443 *** | −0.0635 *** |
(0.0137) | (0.0119) | (0.0142) | (0.0140) | |
Money Supply | 0.0413 *** | 0.1244 *** | 0.1284 *** | 0.1415 *** |
(0.0073) | (0.0178) | (0.0192) | (0.0179) | |
National Saving | 0.0041 ** | 0.0219 *** | 0.0204 ** | 0.0177 *** |
(0.0020) | (0.0046) | (0.0087) | (0.0051) | |
T-bill rate | 0.0582 *** | 0.0734 *** | 0.0692 *** | 0.1094 *** |
(0.0090) | (0.0134) | (0.0122) | (0.0176) | |
Constant | 0.0008 | −0.0011 | −0.0045 | −0.0117 *** |
(0.0022) | (0.0045) | (0.0036) | (0.0031) | |
Diagnostic Test | ||||
Observations | 1780 | 1781 | 1780 | |
Number of banks | 1872 | 46 | 46 | 46 |
AR (2) | 46 | 0.89 | 0.130 | 0.093 |
Sargan test | 0.279 | 0.430 | 0.273 |
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Khan, M.; Jalil, A. Determinants of Interest Margin in Pakistan: A Panel Data Analysis. Economies 2020, 8, 25. https://doi.org/10.3390/economies8020025
Khan M, Jalil A. Determinants of Interest Margin in Pakistan: A Panel Data Analysis. Economies. 2020; 8(2):25. https://doi.org/10.3390/economies8020025
Chicago/Turabian StyleKhan, Murad, and Abdul Jalil. 2020. "Determinants of Interest Margin in Pakistan: A Panel Data Analysis" Economies 8, no. 2: 25. https://doi.org/10.3390/economies8020025
APA StyleKhan, M., & Jalil, A. (2020). Determinants of Interest Margin in Pakistan: A Panel Data Analysis. Economies, 8(2), 25. https://doi.org/10.3390/economies8020025