Impact of Interest Rate Spread on the Profitability of All Commercial Banks in Pakistan

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Zaib Ullah
Muhammad Zubair Khan

Abstract

Objectives: The aim of this study is to evaluate the impact of interest rate spread (IRS) and other bank specific variables on the profitability of banks operating in Pakistan over the period from 2006 to 2015 by using an unbalanced panel data. Methods: The data (sample) of this study consists of all the 40 commercial banks operating in Pakistan. Return of assets (ROA) is used as proxy for performance of the commercial banks and IRS is the focused predictor while bank liquidity (BL), interest income (II), capital adequacy ratio (CAR) have been used as control factors (bank specific). Panel data regression analysis is performed with fixed effect after performing preliminary statistical tests with the help of E-views version 9.5. Findings; The results show that IRS has positive (b =0.069) and significant (p=0.037) impact on ROA along with CAR (p=0.009) and II (p<0.001); whereas, BL revealed an insignificant (p=0.218) and negative impact (b = - 0.821) on the ROA.

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