A synopsis on: “ Determinants of interest rate spread of Nepalese commercial banks”

Author: Purna Man Shrestha

Publication: Journal of Business and Social Sciences Research, December 2022, Vol VII
Presented by : Prasansha Adhikari, Sonia Aryal, Jasudha Neupane

Background:
Bank charges interest on the loan it provides to the borrower and pays interest on the deposit it
receives from the depositor. The interest rate levied to its borrower is referred to as the lending
rate and the interest rate is the deposit rate paid to the depositor. Net Interest income, which is
the difference between the interest received on bank loans and the interest paid on bank
deposits, is the institution's primary source of revenue. Interest rate spread (IRS) denotes the
difference between lending and deposit rates.
Objectives:
1. To determine the factors that affect Nepalese commercial bank’s IRS.
2. To evaluate the relationship among variables under the study, and analyze the role
played by these factors in determining the IRS.
Research Questions: Research questions have not been written.

Theoretical framework:

Return on Assets
Capital adequacy Ratio
Management Efficiency
Interest Rate
Operational efficiency
Spread
Assets quality
Credit risk
Inflation
Gross domestic Product

Methodology:
The study followed a descriptive and causal-comparative research design.
• Multivariate regression analysis was used to identify the determinants.
 • Information on bank related factors is obtained by using the annual report of
25 commercials banks.
• The information on macroeconomic factors is obtained from the publication of
Nepal Rastriya Bank’s quarterly economic bulletin.
• Stata 12 software was used to analyse the collected data.

Findings:
• Bank-specific factors such as return on assets, credit risk, operational
efficiency, and management efficiency and macroeconomic variables such as
the inflation rate and growth of gross domestic product have a significant
influence on interest rate spread.
• There is no significant relationship between the assets quality and capital
adequacy ratio on the IRS of Nepalese commercial banks.
• ROA, CR, INF and GDP are found to have a positive influence on IRS and
ME and OE are found to have a negative influence on IRS.

Conclusion:
• Both Bank-specific and macroeconomic variables should be considered while
formulating interest rate spreads.
• Since there is positive influence of credit risk and negative influence of
operational efficiency so Credit risk should be controlled and the bank
management should maintain sound management and operating activities to
lower IRS.
• Since inflation positively influences IRS so concerned authorities should lower
the level of inflation to lower down IRS.

Recommendation for future research:

• Future researchers may consider market competition as one of the key
independent variables.
• We recommend future researchers to focus on the role of technology and
digitization in determining the IRS of Nepalese commercial banks.
• Future researchers can also incorporate qualitative research methods such as
interviews, surveys, or case studies along with quantitative research design.
• Future researchers can mention research hypothesis, research questions and
scope for future studies.