FACTORS AFFECTING LOAN PRICING

OF COMMERCIAL BANKS

A Project Work Report

By
Ajay Basnet
Shanker Dev Campus
TU Reg. No. 7-2-39-1800-2018
Exam Roll No. 157/18

Submitted to
Office of Dean
The Faculty of Management
Tribhuvan University
Kathmandu

In Partial Fulfillment of the Requirements for the Degree of

Bachelor of Business Administration-Finance (BBA-F)

Putalisadak, Kathmandu

August, 2022
 DECLARATION

I hereby declare that the project work entitled FACTORS AFFECTIG LOAN PRICING
OF COMMERCIAL BANKS submitted to the Faculty of Management, Tribhuvan
University, Kathmandu is an original piece of work under the supervision of Prakash
Kumar Gautam and Bharat Raj Pant and it is submitted in partial fulfillment of the
requirements for the degree of Bachelor of Business Administration- Finance (BBA-F).
This project work report has not been submitted to any other university or institution for
the award of any degree.

……………..
Ajay Basnet
August, 2022
 SUPERVISOR’S RECOMMENDATION

The project work report entitled FACTORS AFFECTING LOAN PRICING OF

COMMERCIAL BANKS submitted by Ajay Basnet of Shanker Dev Campus, is prepared
under our supervision as per the procedure and format requirements laid by the faculty of
management, Tribhuvan University, as partial fulfillment of the requirements for the
degree of Bachelor of Business Administration- Finance (BBA-F). We, therefore,
recommend the project work report for evaluation.

Signature: Signature:
Prakash Kumar Gautam Bharat Raj Pant
August, 2022 August, 2022

iii
 ACKNOWLEDGEMENTS

I express my special gratitude to Campus Chief Prof. Dr. Keshav Raj Joshi. I would like to
express my warm appreciation to our respected BBA-F Director Dhurba Raj Subedi for his
guidelines and inspiration throughout this period and BBA-F Deputy Director Bharat Pant
for his support. Again, I would like to express my sincere thanks to my supervisors
Prakash Kumar Gautam and Bharat Raj Pant for their valuable guidance, advice and
continuous encouragement which proved very helpful in completing this project.

In the course of preparation of this project, I have been supported by a number of people
whose direction and guidance have made this project report possible. I hope that this
project will serve as a useful reference material for all students who wants to do research
on similar topic.

Finally, I would like to express my sincere thanks to my family, friends and well-wishers
for their immense support throughout the preparation of this summer project report.

Thank you.
Sincerely,
Ajay Basnet

iv
 TABLE OF CONTENTS
DECLARATION .............................................................................................................. ii

SUPERVISOR’S RECOMMENDATION ....................................................................... iii

ACKNOWLEDGEMENTS.............................................................................................. iv

TABLE OF CONTENTS.................................................................................................. v

LIST OF TABLES ......................................................................................................... vii

LIST OF FIGURES ...................................................................................................... viii

LIST OF ABBREVIATION ............................................................................................ ix

CHAPTER I: INTRODUCTION ................................................................................... 1

1.1 Background ................................................................................................................. 1

1.2 Statement of the Problem ............................................................................................ 2
1.3 Research Questions ..................................................................................................... 3
1.4 Objectives ................................................................................................................... 3
1.5 Significance of the Study ............................................................................................. 3
1.6 Literature Review ........................................................................................................ 5
1.6.1 Conceptual Review ................................................................................................... 5
1.6.2 Empirical Review ..................................................................................................... 7
1.6.3 Conceptual Framework ........................................................................................... 10
1.6.4 Development of Hypothesis .................................................................................... 11
1.7 Research Methodology .............................................................................................. 11
1.7.1 Research Design ..................................................................................................... 12
1.7.2 Nature and Sources of Data .................................................................................... 12
1.7.3 Population and Sample Design ............................................................................... 13
1.7.4 Data Gathering Procedure....................................................................................... 13
1.7.5 Data Analysis Procedures ....................................................................................... 13
1.7.6 Limitations of the Study ......................................................................................... 15
CHAPTER II: DATA PRESENTATION AND ANALYSIS....................................... 16

2.1 Descriptive Analysis of Data ..................................................................................... 16

2.2 Correlation Analysis .................................................................................................. 17
2.3 Regression Analysis .................................................................................................. 19
v
2.4 Anova Analysis ........................................................... Error! Bookmark not defined.
2.5 Regression Coefficient ................................................ Error! Bookmark not defined.
2.7 Major Findings .......................................................................................................... 20
2.6 Testing of Hypothesis ................................................................................................ 22
CHAPTER III: CONCLUSION AND ACTION IMPLICATION ............................. 23

3.1 Summary ................................................................................................................... 23

3.2 Conclusion ................................................................................................................ 25
3.3 Implications .............................................................................................................. 26
REFERENCES .............................................................................................................. 27

vi
 LIST OF TABLES

Table 1. Empirical Review ................................................................................................. 7

Table 2. Descriptive Statistics .......................................................................................... 16
Table 3.Correlation Analysis ........................................................................................... 18
Table 4. Model Summary ................................................................................................. 19
Table 5. 𝐴𝑛𝑜𝑣𝑎𝑎 ............................................................... Error! Bookmark not defined.
Table 6. 𝑅𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑡 𝑎 .................................... Error! Bookmark not defined.

vii
 LIST OF FIGURES
Figure 1. Conceptual Framework .................................................................................... 11

viii
 LIST OF ABBREVIATION

GDP : Gross Domestic Product

DIR : Deposit Interest Rate

OCTAR : Operating Costs to Total Assets Ratio

ROA : Return on Assets

DR : Default Risk

LP : Loan pricing

DF : Degree of Freedom

i.e. : That is

No. : Number

SPSS : Statistical Package for Social Science

% : Percentage

& : And

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 CHAPTER I: INTRODUCTION

1.1 Background

Loan pricing or lending rate is the lowest rate of interest at which banks can lend money to
other banks (dictionary.cambridge.org). It means determining the interest rate for granting
loan to creditors, be it individuals or business firms. Commercial banks are the backbone of
the country’s economy, they collect funds from the public and place them in financial assets
as well as provide loan to public on certain interest rate. When banks lend money, interest is
charged on it. Determination of the appropriate lending rates usually becomes a major issue
in banking industry because it is very difficult to exactly know what the actual loan risk a
particular loan application carry. Banks cannot charge too high loan rates as it will disturb the
banking relationship with the borrowers with high lending rate. On the other hand, they do
not charge too low loan rates because the revenue from the interest income will not be
enough to cover the cost of deposits, general expenses and the loss of revenue from non-
performing loan portfolio (Bhattarai, 2015).

Lending interest rate of commercial banks may be influenced by a number of factors. The
classical theory argues that the rate of interest is determined by two forces. Firstly, the
supplies of savings, derived mainly from households, and second the demand for investable
capital, coming mainly from the business sector (Rose, 2003). Thompson (2006) asserts that
banks may well set their lending rate according to a certain “mark-up” relative to the deposit
rate. Rational expectation theory explains that the best estimation for future interest rates is
the current spot rate and that changes in interest rates are primarily due to unexpected
information and or changes in economic factors (Irungu, 2013).

Banks are learning to review their risk portfolios using the criteria laid down by Basel II.
Greenspan has indicated that Basel's goal is to induce bankers to improve their risk
management capability, including how the institutions price products, reserve for loss, and
control their operations (Hempel & Simonson, 1999).

Bank lending interest is determined through four categories of variables. They are: individual
bank-specific factors such as operating or administrative costs, non-performing loans, return
on assets, structure of the balance sheet, non-interest income or non-core revenues, bank size,
bank liquidity, among others; institutional, policy and regulatory factors such as implicit and
explicit taxation (reserve requirements), central bank discount rate, and inter-bank rate;

1
market structure which focuses on factors such the competition in the banking sector (market
power), bank concentration, and financial sector liberalization and macroeconomic factors.
The macroeconomic view focuses on inflation rate, GDP growth, exchange rate, interest rate
policies, gross national savings, and investment and capital formation as factors driving
interest spreads and margins in the banking system (Ansari & Dhal, 2013). Some studies
focus on only one category of factors while others consider two or all the four categories of
factors. Here, our study will be focused on individual bank-specific factors only. The factors
affecting loan pricing were examined by defining a set of independent variables (deposit rate,
operating cost to total assets ratio, profitability and default risk) which are directly related to
bank balance sheets and bank characteristics. The lending rate or loan pricing is taken as
single dependent variable. The descriptive and causal research design is used to investigate
the loan pricing/lending interest rate behavior.

1.2 Statement of the Problem

In Nepal if we observe the past, then the price of loans of Nepalese commercial banks was
relatively high for a long period, thus limiting access to capital and inhibiting economic
growth. Although there has been a trend towards lower lending rates and narrower spreads in
recent years, they are still relatively high. Banking industry in Nepal is still growing and it
should ensure that effective strategies are put in place to minimize lending interest rate.
Moreover, the interest rates charged on lending by commercial banks have been a sensitive
and recurring policy issue in Nepal.

Attracting and retaining profitable customers, and increasing revenue from those customers,
is a priority of the managers of all banks in today’s globalized marketplace. It is particularly
important in the highly competitive retail financial services market, where the core business
of banking continues to be “the profitable management of risk”. Some of the bank and
financial institutions of Nepal have already failed during past years and are in the process of
liquidation (Sapkota, 2011). In the past, Nepal bank limited and RBBL nearly collapsed due
to high non-performing loan of over fifty percent of their total assets. Studies show that the
failure of banks in Nepal was also the result of the high non-performing assets due to and the
result of lending without differentiating markets, products and borrowers’ credit worthiness
and excessive loan exposure to real estate (Sapkota, 2011).

Thus, it is very much needed in today’s scenarios that the commercials banks determine,
regulate and manage the loans/credit rate efficiently and effectively and this study therefore

2
seeks to fill existing knowledge gap investigating determinants of lending rates in
commercial banks in Nepal.

1.3 Research Questions

The research questions for the study are as follows:

a) Is there any significant influence of deposit rate on loan pricing of banks?

b) Is there any significant influence of operating costs to total assets ratio on loan pricing
of banks?
c) Is there any significant influence of profitability on loan pricing of banks?

d) Is there any significant influence of default risk on loan pricing of banks?

1.4 Objectives
Loan pricing is sensitive topics for commercial banks and investigating the determinants of
lending interest rate is highly important for sustainability of the banks. The purposes of this
study are as follows:

a) To analyze the influence of deposit rate on loan pricing of commercial banks.

b) To examine the influence of operating costs to total assets ratio on loan pricing of
commercial banks.

c) To examine the influence of profitability on loan pricing of commercial banks.

d) To analyze the influence of default risk on loan pricing of commercial banks.

1.5 Significance of the Study

This study tries to shed some light on the lending decision behavior of Nepalese banks. It is
quite important to understand the functioning of the banking system in emerging markets in
general and in Nepal in particular to know how banks regard risk and relationship indicators
of their borrowers and how the consideration of these factors is featured or reflected in loan
terms. It gives some insights about how to improve the lending process in considering risk,
relationship and other factors so that banks may set loan terms such as loan rates, collateral
and credit volume more appropriately.

Bank Executives

3
The results may enable bank executives to have clear understanding about the factors
affecting the lending interest rate and also help them to decide appropriate lending interest
rate that are I line with the preferences of the customers. The study may also help banks to
identify possible weaknesses in their lending decisions and to improve the efficiency as well
as reducing the probability of non-performing loans.

Policymakers

It may guide policymakers to formulate policy to promote healthy competition in the banking
system by properly recognizing, addressing and improving the loan pricing ability and
possible monopoly power of banks. It may guide policymakers to obtain objective of
reducing the cost of borrowing. From a policy perspective, lower lending rates are desirable,
as they tend to have a positive influence on new and existing investments, improve the
competitiveness of Nepalese businesses and contribute to growth and development. These
welfare effects would lead to generally higher living standards and financial surpluses.

Regulators

Regulators can benefit from the information on the roles of different factors in the lending
decision and design appropriate directives regarding relationship-based loans (to prevent
adverse connected lending that creates moral hazard behavior). Regulators can benefit from
having a better understanding of how Nepalese banks actually consider credit risk and
relationship factors in making their lending decisions i.e., loans interest rates,
collateralization and credit volume. Thus, the findings can help regulators to improve
supervision of bank lending such as designing credit risk management guidelines for banks to
govern their credit risk exposure e.g., risk-weighted assets, lending limits, concentration of
lending and capital adequacy ratios.

Academicians and Researcher

Academicians will also benefit from the findings of this study as it will add to the body of
existing knowledge in finance. Researchers will benefit from documented information into
determinants of lending rates in commercial banks.

Fund Manager and Investors

Fund managers who act as custodian and managers of the funds will benefit from knowing
criteria that determines the most suitable bank to invest funds. Potential investors, both local

4
and international, who may want to channel their funds for investment in national and local
areas will benefit from a greater variety of risk-return profiles for making investments.

1.6 Literature Review

This section deals with the various concepts in regard to the relationship between credit risk
management and financial performance of commercial banks. The researcher will discuss
various theories and their implications to the study. It will also give a review of determinants
of financial performance of commercial banks and other empirical studies done on the study.
Finally, a summary of the literature review will be critically analyzed.

1.6.1 Conceptual Review

Banks perform the role of financial intermediation by mobilizing savings from the public in
the form of deposits and then lend this on to borrowers. Banks act as an intermediary to
channel credits on behalf of the depositors. Banks are supposed to do this job better than the
public as they specialize in the lending business and should be experienced at assessing risk.
Banks are active in information production and loan contracting to resolve problems due to
asymmetric information. Banks have to balance their goals between generating a certain
amount of profit and managing the risk from their lending activities. Banks have to be careful
in their lending decisions, not to extend loans to too many companies that may not have the
ability or willingness to repay.

Loan Pricing / Lending Interest

The lending interest rate is the percentage of the loan amount that the lender charges to lend
money. When banks lend money to customers, interest is charged on it for a number of
reasons, including value preservation, compensation for risk, and profits among others
(Sheriff and Amoako, 2014). It is observed that the bank credit depends upon the activity. As
economy grows bank credit accelerates while the slow growth of the economic activity or the
decline in economic activity results decline in bank credit. Hence it is widely accepted that
bank credit exhibits pro-cyclicality (Dash & Kabra, 2010). The pro-cyclical trend of the bank
credit can be explained with the help of many factors.

Deposit Interest Rate

Deposit interest rate is the average interest rate on retail deposits at each bank (in percent).
For a viable banking system, it is suggested that banks must recover the cost of deposit funds
from borrowers and earn a positive spread. Kaymaz and Kaymaz (2011) have obtained strong

5
evidence of one-way causality between loan interest rates and deposit interest rates. They
asserted that in setting their loan interest rates, banks use deposit interest rates of the
preceding period.

Operating Cost to Total Assets Ratio

Operating cost to total assets ratio measures the cost required to provide a loan unit, and
depends on the productivity of staff and other operating costs (administrative burdens, branch
network, transport, depreciation, etc.). The lower the ratio is, the higher the efficiency of the
commercial banks. Moreover, high operating costs are likely to include costs due to
inefficiency leading to higher lending interest rate and hence this variable is commonly used
as an indicator of operational inefficiency (Bhattarai, 2015). Mbao, Kapembwa, Mooka,
Rasmussen and Sichalwe (2014) also found that operating costs has positive effect on lending
rates.

Profitability

Hermanson (1989) defines that profitability is the organizations’ ability to generate income
and its inability to generate income is a loss. For a stable and sustainable banking system,
banks should earn sufficient profit to satisfy shareholders while keeping credit and liquidity
risks under tolerable levels. This is generally considered as a good indicator to evaluate the
profitability of the assets of a bank in comparison to other banks in the banking industry.

Default Risk

Default/Credit risk is critical since the default of a small number of important customers can
generate large losses which can lead to insolvency (Bessis, 2002). A neoclassical finance
theory perspective states that higher credit risk is expected to be associated with higher return
in terms of loan interest rate. A contrarian perspective states that banks are likely to follow
softer loan interest rate policy in order to avoid loan defaults. Variation in credit risk may
reflect a change in the health of a bank’s loan portfolio (Cooper, Jackson & Patterson, 2003),
which in turn may influence the performance of the institution. Nonperforming loan is also
another variable which affect lending rate, this variable is measured as the ratio of the total
loan This means one bad Joan may wipe out profits from an entire portfolio of loans as the
principal lost in the bad loans must come out of the total profits of the bank or from
shareholders’ funds (Zoeb, 1993).

6
 1.6.2 Empirical Review
Table 1
Empirical Review
Sources Major Objectives
Bhattarai To investigate the
(2015) determinant of lending
rate of Nepalese
commercial banks.
Bhattarai To identify the impact of
(2015)
macroeconomic variables
(GDP, Inflation, and Real
Effective Exchange Rate)
and bank specific
variables (size, change in
loan, real lending rate of
interest and share of loan
to total assets) on the non-
performing loan of the
commercial banks in
Nepal.
Ansari To test and confirm the
(2015) effectiveness of the
monetary policy along
with common
determinants of banks’
lending and how it affects
the lending decision of
commercial banks in
India.
Methodology
Research Design: Descriptive and
Casual
Nature and sources of data:
Secondary data
Population and Sample:
6 commercial banks
Estimation
Strategy: Pooled OLS, fixed
effects and random effects model
Research Design:
Descriptive and Causal
Nature and sources of data:
Secondary data
Population and Sample:
26 commercial banks
Data Collection: Through
published documents of the
commercial banks and NRB
Data Analysis: Multiple regression
equation
Research Design: Descriptive and
casual
Nature and sources of data:
Secondary data
Population and sample: 33
Commercial banks
Estimation strategy: Dynamic panel
data methodology
7
Findings
-Profitability is negatively associated
with lending rate.
-Default risk positively impact
lending rate.
-Deposit rate seems weak in
explaining the variation of lending
rate.
-Operating costs to TAs ratio positively
impact lending interest rate.
-Macroeconomic variables such as the
GDP growth rate have no significantly
impact on nonperforming loan.
-The bank which charges relatively
higher real interest rate has higher
performing loan.
-If the bank is government owned bank,
the non-performing loan would be
higher than that of the private owned
banks.
-Size of the bank has insignificant
impact on non-performing loans.
-the interaction between policy rate and
the competitiveness in the banking
sector has a negative impact and highly
significant coefficient.
-Bank spreads are positively impacted
by the policy indicators.
Regarding the bank specific variables,
loan interest rates and their spread
showed statistically significant positive
relationship with operating cost
profitability and capital adequacy, loan
maturity, asset quality, bank size and
liquidity indicators.
-Macro variables such as GDP growth
Malede To confirm the main
determinants of
(2014)
commercial bank lending
in Ethiopia.
To determine the effect of
internal factors (bank size,
credit risk, deposit,
liquidity ratio and
investment in security)
and external factors (GDP,
cash required reserve and
interest rate) on
commercial banks’
lending.
Research Design:
Descriptive and Causal
Nature and sources of data:
Secondary data
Population and
Sample:
8 commercial banks
Estimation strategy:
Multiple regression analysis
-There is significant positive
relationship between commercial bank
lending and credit risk. Deposit has
positive statistically insignificant
relationship with commercial bank
lending.
-Bank size has positive significant
relationship with commercial bank
lending.
- Gross domestic product affects
commercial bank lending positively.

Bhattarai (2015) analyzed the determinants of lending interest rates of Nepalese commercial
banks. Major objective of the study was to investigate the determinants of lending rate of
Nepalese commercial banks. Descriptive and causal research design was used. Secondary
data were collected from 6 commercial banks which were selected as a sample. Pooled OLS,
fixed effects and random effects model was used for the data analysis and hypothesis testing.

It was found that profitability is negatively associated with lending rate. Default risk has
positive impact lending rate. Deposit rate seems weak in explaining the variation of lending
rate as per this study. Operating costs to TAs ratio also positively impact lending interest rate.

Bhattarai (2015) measured determinants of non-performing loan in Nepalese commercial

banks. Its major objective was to identify the impact of macroeconomic variables (GDP,
Inflation, and Real Effective Exchange Rate) and bank specific variables (size, change in
loan, real lending rate of interest, and share of loan to total assets) on the non-performing
loan of the commercial banks in Nepal. Descriptive and causal research design was used.
Secondary data were collected through published documents of the commercial banks and
NRB. 26 commercial banks were selected as a sample. Multiple regression equation models
were used for the data analysis and hypothesis testing.

This study found that Macroeconomic variables such as the real effective exchange rate have
significantly negative impact on non-performing loan. The bank which charges relatively
higher real interest rate have higher non-performing loan. If the bank is government owned
bank the non-performing loan would be higher than that of the private owned banks. The size
of bank has insignificant impact on non-performing loan of the bank.

8
Ansari (2015) analyzed about determinants of commercial banks’ loan pricing in India.

This study’s major objective was to test and confirm the effectiveness of the monetary policy
along with common determinants of commercial banks’ lending and how it affects the
lending decision of commercial banks in India. Descriptive and causal research design was
used and secondary data were collected for study purpose. 33 commercial banks were
selected as sample for collecting data. Dynamic panel data methodology was used for the
data analysis.

It was found that the interaction between policy rate and the competitiveness in the banking
sector has a negative and highly significant coefficient relation. Bank spreads is positively
impacted by the policy indicators. Regarding the bank specific variables, loan interest rates
and their spreads showed statistically significant positive relationship with operating cost,
profitability and capital adequacy, loan maturity, asset quality, bank size and liquidity
indicators. Macro variables such as GDP growth and inflation rate showed positive impact
on loan interest rates.

Malede (2014) conducted research about determinants of commercial banks’ lending in

Ethiopian commercial banks. This study’s major objective was to confirm the main
determinants of commercial bank lending in Ethiopia as well as to determine the effect of
internal factors (bank size, credit risk, deposit, liquidity ratio and investment in security) and
external factors (GDP, cash required reserve and interest rate) on commercial banks’ lending.
Descriptive and causal research design was used and secondary data were collected for study
purpose. 8 commercial banks were selected as sample for collecting data. Multiple
regression equation models were used for the data analysis and hypothesis testing.

He found out that there is significant positive relationship between commercial bank lending
and credit risk. Deposit has positive statistically insignificant relationship with commercial
bank lending. Bank size has positive significant relationship with commercial bank lending.
Gross domestic product affects commercial bank lending positively.

Georgievska, Kabashi, Manova-Trajkovska, Mitreska and Vaskov (2011) researched about

determinants of lending interest rates and interest rate spreads in Special Conference Paper of
Bank of Greece. The main objective of this research was to investigating the determinants of
lending rates and interest rate spreads.
Descriptive and causal research design was used and secondary data were collected for study
purpose. 27 commercial banks were selected as sample for collecting data. Panel estimation

9
strategy, fixed effects and random effects model was used for data analysis and hypothesis
testing.
Their research study result indicates that lending rates are mostly influenced by bank size and
market share and to a lesser extent by deposit rates and non-performing loans. In addition,
policy variables such as the domestic policy rate and the foreign interest rate also appear to
be quite important. Furthermore, the bank size and the market share, as well as the
differential between domestic and foreign rates, are the most important factors affecting
interest rate spreads, while the effect of other factors is less clear-cut. The decrease in the
costs of financing (deposit rates) will certainly cause a decrease in the price of loans,
although this factor has a relatively weaker influence than expected. Also, the rise in the
central bank bill rate and the EURIBOR rate (both as an opportunity cost and a real cost,
respectively) has a considerable effect in the rise of the lending rates.

1.6.3 Conceptual Framework

The theoretical framework helps to make logical sense of the relationship of the variables and
factors that have been deemed important to the problem. It provides definitions of
relationships between all the variables so that the theorized relationship between them can be
understood. The Loan Pricing or Lending Rate is studied as single dependent variable in this
study. It is the average interest rate on lending of commercial banks. Lending rate is the price
zthat a borrower paid when taking loans from the commercial banks.

The factors affecting loan pricing were examined by defining a set of independent variables
which are directly related to bank balance sheets and bank characteristics. The relationship
among various variables can be presented below:

Deposit Interest Rate

Operating cost to Total Assets Ratio

Loan Price
Profitability

Default Risk

10
Figure 1

Conceptual Framework

Source. (Bhattarai, 2015)

The choice of variables in this study was mostly affected by the approach in other empirical
studies, as well as by determinants suggested by the literature.

1.6.4 Development of Hypothesis

Research hypothesis is a formal statement that presents the expected relationship between an
independent and dependent variable. This study will be anchored on the following
hypothesis:

H1: There is significant positive relationship between Deposit Interest Rate (DIR) and loan
pricing/ interest rate (LP).

H2: There is significant positive relationship between Operating Costs to Total Assets Ratio
(OCTAR) and loan pricing.

H3: There is significant positive relationship between Profitability (ROA) and loan pricing.

H4: There is significant positive relationship between Default Risk (DR) and loan pricing.

H5: Deposit Interest Rate has significant positive influence on loan pricing

H6: Operating Cost to Total Assets Ratio has significant positive influence on loan pricing

H7: Return on Profitability has significant positive influence on loan pricing

H8: Default risk has significant positive influence on loan pricing.

1.7 Research Methodology

This section deals with how the research is to be conducted in order to achieve the stated
objectives and it present the research design and methodology that has been used to carry out
the research. It presents the research design, the population, and sample selection, sampling
procedure, and research instruments, methods of data analysis and data collection and
limitations encountered during the research process.

11
1.7.1 Research Design

The research design is the plan and structure of investigation so conceived so as to obtain
answers of the research questions. The plan is the overall program of the research and
includes an outline of what the investigator will do from writing the hypothesis and their
operational implications for the final analysis of data. The essential of research design as an
activity and time-based plan, always based on the research questions, guides the selection of
sources and types of information, a frame work for specifying the relationship among
variables and outlines the procedure for every research activity. The research design as the
outline plan or scheme that is used to generate answers to the research problems, it is
basically the structure and plan of investigation.

According to the nature of the issue and objectives of the research, the descriptive and causal
research design is used to investigate the loan pricing/lending interest rate behavior.

Descriptive research seeks to establish factors associated with certain occurrences, outcomes,
conditions or types of behavior. This is deemed appropriate because the study involved in
depth a study of determinants of loan pricing and its effect on commercial banks’ lending in
Nepal which helped the researcher in describing the state of the real current situation of
banks. A descriptive study was undertaken in order to ascertain and be able to describe the
characteristics of the variables of interest in the study. The Causal research design, also called
explanatory research, is the investigation of (research into) cause-and-effect relationships
among variables. In other words, causal-comparative research is that research in which the
independent variable or variables have already occurred and in which researcher starts with
the observation of the dependent variable or variables. Here, it is used for investigating cause
and effect relation that exist between determinants of loan and price of loan.

1.7.2 Nature and Sources of Data

Various quantitative data were collected from secondary sources. The data from Economic

Bulletin and Banking and Financial Statistics published by Nepal Rastra Bank and various
Economic Survey published by Ministry of Finance; Government of Nepal were utilized for
the purpose of the study. The main sources of data collection were from the balance sheet and
annual reports of selected commercial banks and used for purpose of the study.

12
1.7.3 Population and Sample Design

Target population is that population to which a researcher wants to generalize the results of
the study. The population of interest for the study was all licensed “A-class” Banking
institutions of Nepal. There are 27 licensed commercial banks in Nepal. Among them, 10
commercial banks are used as sample for this study.

This study examines the determinants of lending rate in commercial banks of Nepal over the
period of 5 years (2074-2078). The reason behind choosing of the latest five years’ period is
to include the fresh data in the analysis and as the data are from pooling of cross-sectional
and time series, thus it seems sufficient to generate data for the analysis.

The convenience sampling method was used in choosing the banks for the study. Moreover,
in selecting the 10 banks for the study, due care is given to include banks such as: joint
venture, domestic, best performer, average performer and comparatively weak performer in
the sample. The banks selected for the study are Nepal Bank Ltd., Agriculture Development
Bank Ltd., Nabil Bank Ltd., Civil Bank Ltd., Nepal Bangladesh Bank Ltd., Standard
Chartered Bank Ltd., Sanima Bank Ltd., Global IME Bank Ltd., Prime Commercial Bank
Ltd., and Mega Bank Nepal Ltd. The study assumes that the selected commercial banks
appear fairly represent the study population.

1.7.4 Data Gathering Procedure

Data are sourced from the annual reports of the banks and various economic bulletin as well
as from Nepal Rastra Banks reports in the sample. The data include time-series and cross-
sectional data, i.e., panel data set and estimated the impact of various determinants on loan
pricing in commercial banks using correlation and regression model.

1.7.5 Data Analysis Procedures

The collected data was thoroughly examined and checked for completeness and
comprehensibility. The data was then be summarized, coded and tabulated. Descriptive
statistics such as mean, median and standard deviation was used to analyze the data. Also, the
multiple regression analysis: the relation of one dependent variable to multiple independent
variables and correlation analysis was done to establish the extent to which commercial banks
determine factors influencing loan rates. Data were coded and entered into the Statistical
Package for Social Sciences (SPSS) for analysis. SPSS was used to perform the analysis as it

13
aids in organizing and summarizing the data by the use of descriptive statistics and inferential
statistics.

A linear regression model of bank lending rate versus factors influencing lending rates for
the commercial banks was applied to examine the relationship between the variables. The
model treats lending rate for the commercial bank as the dependent variable while the
independent variables were factors influencing the determination of lending rates which
include Deposit Rate, Profitability, Default Risk and Operating costs to Total Assets Ratio.

After a review of some measurable determinants of Lending Rate/ Loan Price, we set out the
data and the regression equation. The researcher used the multiple regression analysis to test
the hypothesis, which states that there is a significant relationship between the Loan Price and
Determinants/ factors affecting loan price.

The relationship equation was represented in the linear equation below:

Y = α + β1X1 + β2X2 + β3X3+ β4X4 + ε

Loan Price = α + β1DIR+ β2OCTAR + β3ROA + β4DR+ ε

Where,

Y = Loan Price / Lending Interest Rate of bank

The Explanatory Variables: The loan price indicators which are concerned with the

examination of various determinants associated with bank’s loan price. It is measured by the
following proxies:

α= Constant parameter/Intercept β1, β2, β3 & β4= Beta Coefficients of independent variables.
It is the slope which represents the degree with which loan price/interest rate changes as the
independent variable changes by one-unit variable. ε= Error term (assumed to have zero
mean and independent across the time period)
LP = Loan Price/ Lending interest rate of bank in year t

OCTAR = Operating cost to total assets ratio of bank in year t

DIR = Deposit interest rate, which is the average interest rate on deposits of bank in year t

14
ROA = Profitability, which is calculated as net income divided by total assets of bank in year
t

DR = Default risk, which is calculated as non-performing loans to total loans of bank in year t

1.7.6 Limitations of the Study

The limitations of this study include

a) This study considers the data of only 10 commercial banks of Nepal so small sample
size.
b) In this study, chances of misinterpretation of information due to quantitative nature of
data.

c) The findings from this study may not reflect all commercials banks.

d) The researcher had to rely on organizations for the data.

e) Constraints in data availability where some of the data are missing.

f) Limited time for the study.

15
 CHAPTER II: DATA PRESENTATION AND ANALYSIS

2.1 Descriptive Analysis of Data

Descriptive statistics is the discipline of quantitatively describing the main features of

collected data. It provides simple summary about the sample and about observation we made.
The descriptive statistics of the variables used in the study are presented in Table 2.
Table 2
Descriptive Statistics

Std.
N Minimum Maximum Mean Deviation
Loan Price 50 8.56 12.47 10.674 4 1.38914

Deposit Interest Rate 50 2.98 6.70 4.8184 .90100

Operating Cost to Total 50 .74 8.03 3.4746 2.35183

Assets Ratio
Return On Assets 50 .01 3.12 1.8530 .71623
Default Risk 50 .01 5.35 1.7064 1.42740
Valid N (list wise) 50

It is shown that among the 10 sample banks taken, the minimum value of Loan Price is 8.56%
and maximum value is 12.47%. The mean value is 10.6744% meaning that Nepalese
commercial banks charge, in average, 10.6744% annual interest on their loans and advances
and standard deviation is 1.38914 over 5 years.

Among the 10 sample banks taken, the minimum value of Deposit Interest Rate is 2.98% and
maximum value is 6.70%. The average deposit rate is 4.8184% and standard deviation is
0.90100 over 5 years. The prevailing deposit interest rates are not found attractive to
customer deposits. There is also low variation among banks deposit rate which is evident
from low s.d. 0.901.

It is revealed that among the 10 sample banks taken, the minimum value of Operating Cost to
Total Assets Ratio is 0.74% in most efficient bank and maximum value is 8.03% at the least
efficient bank. The average OCTAR i.e., mean value is 3.4746% and standard deviation is

16
2.35183 over 5 years. The standard deviation looks highest as compared to other variables
used in this study and it indicates the substantial variation of operating cost during sample
period. From this result, we can interpret that Nepalese commercial bank are incurring high
operating costs.

Similarly, among the 10 sample banks taken, the minimum value of Return on Assets is
0.01% and maximum value is 3.12%, The average ROA (profitability) is 1.8530% and
standard deviation is 0.71623 over 5 years. The result shows that Nepalese commercial
banks have low profitability. There is also low variation among the bank’s profitability which
is evident from low standard deviation, which is 0.71623.

Finally, among the 10 sample banks taken, the minimum value of Default Risk is 0.01%,
maximum value is 5.35%. The average loan default is 1.7064% and standard deviation is
1.42740 over 5 years. The result shows that Nepalese commercial banks are incurring low
default risks. Also, the default risk is found more volatile during sample period.

Here, it is shown that the number of samples for this model is 50 where there is no missing
value and it is deemed valid from the descriptive statistics.

2.2 Correlation Analysis

Pearson correlation matrix has been used for testing all hypotheses. The purpose of
correlation analysis is to investigate the extent to which a variation in one factor corresponds
with variation in one or more factors based on correlation coefficient. The correlation
analysis was conducted to find out the mutual relationship or connection between dependent
and independent variables. The correlation coefficients among study variables are shown in
Table 3.

17
Table 3
Correlation Analysis

Operating
Cost to
Deposit Total Assets Ratio Return On
Loan Price Interest Rate Assets Default Risk
Loan Price 1

Deposit .474** 1
Interest Rate
.001

Operating .261* .023 1

Cost to Total
.047 .873
Assets Ratio

Return On .029 -.230 .091 1

Assets
.839 .108 .528

Default Risk -.184 .050 .558** -.183 1

.202 .728 .000 .203

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
b. List wise N=50

Table 3 indicates the correlation of 10 banks which shows the relationship between dependent
variable (Loan Price) and independent variable (OCTAR, DIR, DR and ROA). We can see
that the correlation coefficient between loan price and deposit interest rate is r=0.474, which
signifies there is positively moderate correlation between loan price and DIR.

Similarly, the correlation coefficient between loan price and OCTAR is r= 0.261 which
signifies there is positively weak correlation between loan price and operating cost to total
assets ratio.

Again, the correlation coefficient between loan price and return on assets is r=0.029 which
signifies that there is positively weak correlation between loan price and ROA. Similarly,
there is negatively weak correlation between loan price and default risk (r= -0.184).
18
2.3 Regression Analysis

Regression analysis helps to find out the impact of independent variables on the dependent
variable. The regression analysis is conducted for the whole sample. In the study, regression
analysis is done for the investigating relationships between different determining factors of
loan price and loan price. Findings from the regression analysis for the selected banks over
10 are depicted in tables as follows:

Table 4
Model Summary

Coefficients t-value Sig

(constant) 0.6911 0.648
Deposit Interest rate 0.468 3.796 0.00
Operating cost to total assets ratio 0.25 2.03 0.00
Profitability 0.415 4.63 0.124
Default Risk 0.286 3.343 0.245
R Square 0.462
Adjusted R square 0.414
Durbin Watson 2.2
F value 47.89

On table 8, the model summary showed that R square had 0.462 variations in loan pricing
while adjusted R squared is 0.414 which is close to R square. A high value of R squared
shows strong model and 46.2% predictability is satisfactory. Autocorrelation is tested
through Durbin Watson which is 2.2 showing negative autocorrelation in data.

It showed the influence of Deposit Interest Rate, Operating cost to total assets ratio,
profitability in loan pricing. The model shows that Deposit Interest rate has significant 0.468
positive influence on loan pricing. Similarly, Operating cost to total assets ration has positive
0.25 significant influence on loan pricing. However, the profitability has positive
insignificant positive influence on loan pricing. Default risk also has insignificant positive
influence on loan pricing. Deposit Interest rate has strong positive influence on loan pricing
than Operating cost to total assets ratio, profitability and default risk.

19
The summary of regression analysis shows influence of Deposit Interest rate, operating cost
to total assets ratio, profitability and default risk on loan pricing. However, the result are
based on the sample collected and generalized. Therefore, a deeper analysis is required
instead of general view.

2.7 Major Findings

The purpose of study is to investigate the various factors influencing the loan pricing of
commercial banks. The study aims to examine the impact of the independent variables: DIR,
OCTAR, DR and ROA on dependent variable loan price. For this purpose, secondary data
was collected and analyzed in systematic way to derive the findings. In the study, the data
was collected through annual reports of banks, NRB reports and economic reports and
analyzed using mean, standard deviation, correlation and regression.

It is found that among the 10 sample banks taken, the mean value of Deposit Interest Rate is
4.8184%, mean value of Operating Cost to Total Assets Ratio is 3.4746%, the average ROA
(profitability) is 1.8530% and the average loan default is 1.7064%. Similarly, the standard
deviation of deposit interest rates, Operating Cost to Total Assets Ratio, ROA (profitability)
and default risk are 0.90100, 2.35183, 0.71623 and 1.42740 respectively.

It is also found that the correlation coefficient between loan price and deposit interest rate is
r=0.474, which signifies there is positively moderate correlation between loan price and DIR.
The P-value is found to be 0.001 which is less than 0.05. This means there is significant
relationship between loan price and DIR. Similarly, the correlation coefficient between loan
price and OCTAR is r= 0.261 which signifies there is positively weak correlation between
loan price and operating cost to total assets ratio. The P-value is found to be 0.047 which is
less than 0.05. This means there is significant relationship between loan price and OCTAR.

Again, the correlation coefficient between loan price and return on assets is r=0.029 which
signifies that there is positively weak correlation between loan price and ROA. The P-value is
found to be 0.839 which is greater than 0.05. This means there is no significant relationship
between loan price and ROA. Similarly, there is negatively weak correlation between loan
price and default risk (r= -0.184). The P-value is found to be 0.202 which is greater than 0.05.
This means there is no significant relationship between loan price and DR.

20
Operating costs to total assets ratio are found to have positive and significant relationship
with loan price. The result is consistent with Bhattarai (2015) which observed positive and
significant effect of operating costs to total assets ratio on loan price. The result also confirms
Ansari (2015) as there is positive relationship between operating cost and loan price. The
reason is likely to be that costs of banks increase due to inefficiency resulting high loan price.

Similarly, deposit interest rate is found to have positive and significant relationship with loan
price. It is consistent with Malede (2014) which observe there is positive correlation between
deposit and loan price. However, it is inconsistent with Bhattarai (2015), where it is found
that deposit rate is insignificant on determining loan price. It can be justified as when
Nepalese commercial banks pay high deposit rate then it encourages them to increase loan
price too.

Again, it is found that profitability (ROA) has insignificant relationship with loan price. This
result is inconsistent to Bhattarai (2015), where he found positive association between
lending rates and profitability (ROA). The possible reason of such contrary result could be
justified on ground that Nepalese commercial banks aren’t highly profitable and thus,
profitability is neglected while charging higher interest rate on their loans and advances.

Also, it is found default risk have insignificant relation with loan price. The finding is
inconsistent with the findings of Bhattarai (2015), where he found positive association
between DR and loan price. It can be justified as that the default risk cases in Nepal is
considerably low and thus, doesn’t impact much to the loan price of Nepalese commercial
banks.
During regression analysis , R square had 0.462 variations in loan pricing while adjusted R
squared is 0.414 which is close to R square. A high value of R squared shows strong model
and 46.2% predictability is satisfactory. Autocorrelation is tested through Durbin Watson
which is 2.2 showing negative autocorrelation in data.

It showed the influence of Deposit Interest Rate, Operating cost to total assets ratio,
profitability in loan pricing. The model shows that Deposit Interest rate has significant 0.468
positive influence on loan pricing. Similarly, Operating cost to total assets ratio has positive
0.25 significant influence on loan pricing. However, the profitability has positive
insignificant positive influence on loan pricing

21
2.6 Testing of Hypothesis

The significance of all the four components of independent variables of Loan Price is
evaluated with Loan Price at the level of p<0.05.
H1: There is significant relationship between Deposit Rate (DIR) and loan pricing/ interest
rate (LP).
P-value of DIR is 0.000, which is significant at 5% level of significance. So, the hypothesis
H1 is accepted.
H2: There is significant relationship between Operating Costs to Total Assets Ratio
(OCTAR) loan pricing.
P-value of OCTAR is 0.048, which is significant at 5% level of significance. So, the
hypothesis H2 is accepted.
H3: There is significant relationship between Profitability and loan pricing.
P-value of ROA is 0.839 which is greater than 0.05. So, the hypothesis H3 is not accepted.
H4: There is significant relationship between Default risk and loan pricing.
P-value is found to be 0.202 which is greater than 0.05. So, the hypothesis H4 is not accepted.
H5: There is significant positive influence of Deposit Interest ratio on loan pricing.
Coefficients is 0.468 and it is significant. Thus, it is accepted.
H6: There is significant positive influence of Operating cost to total assets ratio of loan
pricing. The coefficient is 0.250 at 0.00 significance. Thus, H6 is accepted.
H7: There is significant positive influence of profitability in loan pricing. The significance is
above 0.05. thus, H7 is not accepted.
H8: There is significant positive influence of default risk in loan pricing. The significance is
above 0.05 and coefficient is 0.319. Thus, hypothesis H8 is accepted

22
 CHAPTER III: CONCLUSION AND ACTION IMPLICATION

3.1 Summary

Loan pricing is the process of determining the interest rate for granting loan to the creditors,
be it individuals or business firms. Banks collect funds from the public and place them in
financial assets as well as provide loan to public on certain interest rate. Generally, the bank
wants to charge a high enough rate to make sure that the loan will be profitable as well as it
will covers enough compensation against the default risk. Loan pricing or lending rate is the
lowest rate of interest at which banks can lend money to other banks
(dictionary.cambridge.org).

The main objective of the study is to examine the factors affecting loan pricing of commercial
banks. The specific objective is to analyze the influence of deposit rate on loan pricing of
commercial banks, to examine the influence of operating costs to total assets ratio on loan
pricing of commercial banks, to examine the influence of profitability on loan pricing of
commercial banks and to analyze the influence of default risk on loan pricing of commercial
banks.

The descriptive and causal research design is used to investigate the loan pricing/lending
interest rate behavior. Descriptive research seeks to establish factors associated with certain
occurrences, outcomes, conditions or types of behavior. This is deemed appropriate because
the study involved in depth a study of determinants of loan pricing and its effect on
commercial banks’ lending in Nepal which helped the researcher in describing the state of the
real current situation of banks. A descriptive study was undertaken in order to ascertain and
be able to describe the characteristics of the variables of interest in the study. The Causal
research design, also called explanatory research, is the investigation of (research into) cause-
and-effect relationships among variables.

The descriptive statistics is the discipline of quantitatively describing the main features of
collected data. It provides simple summary about the sample and about observation we made.
It is found that among the 10 sample banks taken, the mean value of Deposit Interest rate is
4.8184%, mean value of Operating Cost to Total Assets Ratio us 3.4746%, the average ROA
(profitability) is 1.8530% and the average loan default is 1.7064%. Similarly, the standard
deviation of deposit interest rates, Operating cost to Total Assets Ratio, ROA and the Default
Risk are 0.90100, 2.35183, 0.71623 and 1.42740 respectively.

23
The purpose of correlation analysis is to investigate the extent to which a variation in one
factor corresponds with variation in one or more factors based on correlation coefficient. The
correlation analysis was conducted to find out the mutual relationship or connection between
dependent and independent variables. It is found that the correlation coefficient between loan
price and deposit interest rate is r=0.474, which signifies there is positively moderate
correlation between loan price and DIR. Similarly, the correlation coefficient between loan
price and OCTAR is r= 0.261 which signifies there is positively weak correlation between
loan price and operating cost to total assets ratio. Again, the correlation coefficient between
loan price and return on assets is r=0.029 which signifies that there is positively weak
correlation between loan price and ROA. Also, there is negatively weak correlation between
loan price and default risk (r= -0.184).

Regression analysis helps to find out the impact of independent variables on the dependent
variable. In the study, regression analysis is done for the investigating relationships between
different determining factors of loan price and loan price. R square had 0.462 variations in
loan pricing while adjusted R squared is 0.414 which is close to R square. A high value of R
squared shows strong model and 46.2% predictability is satisfactory. Autocorrelation is
tested through Durbin Watson which is 2.2 showing negative autocorrelation in data.

It showed the influence of Deposit Interest Rate, Operating cost to total assets ratio,
profitability in loan pricing. The model shows that Deposit Interest rate has significant 0.468
positive influence on loan pricing. Similarly, Operating cost to total assets ration has positive
0.25 significant influence on loan pricing. However, the profitability has positive
insignificant positive influence on loan pricing. Default risk also has insignificant positive
influence on loan pricing. Deposit Interest rate has strong positive influence on loan pricing
than Operating cost to total assets ratio, profitability and default risk.

Operating costs to total assets ratio are found to have positive and significant relationship
with loan price, which is consistent with Bhattarai (2015) which observed positive and
significant effect of operating costs to total assets ratio on loan price. The result also confirms
Ansari (2015) as there is positive relationship between operating cost and loan price. The
reason is likely to be that costs of banks increase due to inefficiency resulting high loan price.
The finding is consistent with Malede (2014) which observe there is positive correlation
between deposit and loan price as there is positive and significant relationship with loan price
and deposit interest rate. However, it is inconsistent with Bhattarai (2015), where it is found
that deposit rate is insignificant on determining loan price. The justification can be Nepalese
24
commercial banks pays high deposit rate in order to compete in highly competitive market of
Nepal, then it encourages them to increase loan price too.

The profitability (ROA) has insignificant relationship with loan price, which shows
inconsistency to Bhattarai (2015), where he found positive association between lending rates
and profitability (ROA). This contrary can be justified on the ground that Nepalese
commercial banks aren’t highly profitable and thus, profitability is neglected while charging
higher interest rate on their loans and advances.

The default risk has insignificant relation with loan price as found in the aforementioned
analysis. The finding is inconsistent with the finding of Bhattarai (2015), where he found
positive association between DR and loan price. This scenery can be justified as the default
risk cases in Nepal is considerably low and thus, doesn’t impact much to the Nepalese
commercial banks.

3.2 Conclusion

Loan is vital driver of economy and bank is the creator of loan. In banks more than 70% of
total assets are generated through loan. Sufficient supply of capital in economy stimulates the
economy of the nation, thus it is important factor for nations and its individuals. In this study,
we investigated how commercial banks’ loan pricing decisions could be influenced by host of
factors, using panel data methodology and annual accounts data of 10 commercial banks over
the period 2074 to 2078. The descriptive and causal comparative research designs have been
adopted for the study. The Multiple Regression model has been used to examine the
determinants of loan price/ interest rates. The panel data of commercial banks have been
collected from the annual reports of the banks and from different reports of Nepal Rastra
Bank in sample. The dependent variable used in the study is loan price and independent
variables are: operating cost to total assets ratio, deposit interest rate, profitability (ROA), and
default risk.

The estimated regression models reveal that operating costs to total assets ratio has positive
and statistically significant impact on commercial bank loan price. However, Profitability
(ROA) seems weak and insignificant in explaining the relationship with loan price/ rate.
Moreover, default risk has insignificant and weak impact on loan price rate. Deposit interest
rate is found to have positive and significant association with loan price/ interest rate.
Eventually, this study concludes that the major determinants of Nepalese commercial banks’
loan price are operating costs to total assets ratio and deposit interest rate.

25
3.3 Implications

This study offers the following recommendations based on the findings from the empirical
analysis. Firstly, Nepalese commercial banks have excessive levels of loan price which can
pose a significant threat to an institution's earnings and capital base. Banks should try as
much as possible to strike a balance which will help them to cover cost associated with
lending and at the same time, maintain good banking relationship with their borrowers. Bank
management should maintain lending rate at prudent levels which is essential to the safety
and soundness of banking institution. Moreover, bank management should ensure that
appropriate policies procedures, management information systems and internal controls to
maintain lending rate at prudent levels with consistency and continuity.

Secondly, commercial banks must try to decrease their operating cost efficiently and for that
bank management must deliver productive working environment and work mechanism for
their employees. Also, the deposit rates of banks are not quite satisfactory and thus banks
need to change their deposit policy to develop public confidence in respective banks.

Thirdly, there is need to strengthen bank lending rate policy through effective and efficient
regulation and supervisory framework. Commercial banks should develop credit procedures,
policies and improve analytical capabilities of loans by which overall credit management
could be effective to reduce non-performing loans and enhance their profitability. Moreover,
commercial banks should avoid giving out loans that will lead to bad debt.

Finally, there is a need for the government to provide essential infra-structural support to both
lenders and borrowers.

The study investigated the determination of lending rate in commercial banks. Further
research should be carried to determine impact of lending rates on profitability of commercial
banks to establish the extent to which the commercial banks influence profitability of the
commercial banks. The study also recommends that a further study should be carried out to
determine the effects of both micro and macro-economic factors on financial performance of
commercial bank.

26
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