Analysis of Some Inner Factors Affecting the Lending Rate and Commercial Bank Behavior

Abstract

This research study aims to investigate the potential inner factors of the lending rate in the commercial banking sector of Pakistan. For this purpose, seven bank-specific explanatory variables (capital adequacy, management efficiency, liquidity, asset quality, investment to asset, loan to asset and deposit to asset ratios) were selected to determine their impact on lending behavior. Panel data techniques were emplyed on secondary data collected from the annual financial reports from a sample of ninteen major commercial banks over a period of 2007 to 2014. For the purpose of analysis, descriptive statistics, Pearson correlation and panel data techniques for regression analysis such as the fixed effect regression models were considered after conforming to the Hausman specification (1978) test. The findings of this study revealed that only four out of seven explanatory variables (ratio of investment to total assets, deposit to asset, loan to asset and liquidity ratio) have a significant relationship with lending rate. Two of the significant determinants (liquidity ratio and investment to asset ratio) are positively correlated while the remaining two significant explanatory variables (loan to asset ratio and deposit to asset ratio) are found negatively correlated with lending rate. The findings of the study are applicable to the banking sector of Pakistan. The current study ignored the use of macro factors like GDP and inflation, etc. which could be used in future research. ANALYSIS OF SOME INNER FACTORS AFFECTING THE LENDING RATE AND COMMERCIAL BANK BEHAVIOR (An Empirical 112"e-Finanse" 2016, vol. 12 / nr 4 Zulfiqar Ali, Zahid Bashir, Muhammad Usman Arshad, Ahmed Ghazali, Muhammad Asif, Fahad Najeeb Khan Analysis of some inner factors affecting the lending rate and commercial bank behavior

Financing Scheme and Determinant Factors

“…This is probably due to the NPF being too high, so although the OEIR is efficient and the FDR is already high, it has not been able to affect the financing provided in both the PMF and PSF schemes. These results contradict the theory and the results of previous studies, which show a negative effect between OEIR and financing [4,5,9]. However, Arintoko [8] supports these results as his study shows no effect of OEIR on loans in conventional banks.…”

“…These results contradict Arintoko [8], who studied conventional banks and Azizah et al [9], who conclude a positive effect of CAR on financing. However, it is supported by Pratikno & Ratnasari [16], Sutrisno [18]; and Ali et al [5], who show that there is no effect of CAR on financing, even though the effect is negative.…”

“…In this study, liquidity risk is measured by the financing to deposit ratio (FDR). FDR shows the amount of financing provided from public savings, so the larger the FDR, the greater the financing provided [5]. The formulation of the hypotheses is as follows:…”

“…The results of previous studies show a negative influence of NPF on financing [4]. Liquidity risk, as measured by the financing to deposit ratio (FDR), shows the amount of financing provided compared to public deposits, so the larger the FDR, the greater the financing provided [5]. IRBs are very interested in FDR because they can contribute profits to banks [6,7].…”