DETERMINANTS OF BANK INTEREST MARGINS: EVIDENCE FROM BANKING SECTOR OF PAKISTAN

Abstract

This study aims to explore the determinants of net interest margin which is one of the most important variables of banking industry. It determines the efficiency and development of banking sector which in turn augment growth in the overall economy. 20 banks have been selected on the basis of availability of data for the period of 12 year from 2013-2024. Current study also takes into account the bank specific, industry specific and economy specific variables and builds an econometric model for analyzing these determinants of net interest margin. In order to test the proposed relationship ten hypotheses have been formulated indicating the proposed sign and strength of relationship. On the basis of panel fixed effect regression the variable of credit risk, default risk, degree of risk aversion, firm performance, market structure and inflation rate were significant while for the rest of variables no significant relationship was found. Thus out ten hypotheses formulated for the study 6 were accepted while the remaining four could not be accepted. On the basis of results of the study the variables considered as determinants have proved as important factor for the determination of interest margin and in order to modify, manipulate or adjust net interest margin. These factors can be manipulated accordingly so that the bank profitability and efficiency may increase which cause overall prosperity of financial sector and subsequently the overall economy.