FINANCIAL REFORMS AND NET INTEREST MARGINS IN BANKING IN PAKISTAN: A PANEL DATA ANALYSIS

Abstract

In the last decade banking sector emerged as a leading industry in Pakistan and received the significant attention of domestic and foreign investors and Pakistan received huge foreign direct investment (FDI) in the banking sector, several reforms had been introduced in the last few decades. The paper investigated the impact of financial on the net interest margin of Pakistani banks’ by using Bank Specific & Macro Specific data over the period 2001-2005, to evaluate the effectiveness of these reforms. It is suggested by the results that financial reforms and financial liberalization are having a positive impact on banking spread in Pakistan’s case.

Whereas banking regulation and supervision is having a significant and negative impact. Among Bank Specific Variables Bank size, bank equity & bank concentration is found to have a negative and significant impact on net profit margins. GDP as a macro-specific variable is having a significant and negative impact whereas inflation is affecting the net interest margin (NIM) Positively. This paper suggests that financial reforms and liberalization had failed to reduce the spread yet which can be attributed to high monopoly power, high reserve requirements, high central bank discount rate, and high inflation.