In Pakistan, average lending rate of banks is reported at 13.06 % while the deposit rate was at 5.82% in first half of FY2012. This higher spread in the banking sector has increased the banks’ income rapidly. But, this increased spread has been discouraging potential savings and also a constraint on investment activities. As a result, this higher cost of funding to the private sector has been reducing the potential growth of the economy with reduction in the business activities. This has an outcome of high rate of unemployment in the country. According to State Bank of Pakistan (SBP), interest spread in Pakistan has mounted from 4.63% in FY2003 to 7.24% recently. Whereas, this spread is only 2% to 4% in others developed countries. The year-on-year growth in loans to private sector businesses has declined from 22.4 percent in FY08 to 0.7 percent by the end of recent year. Still, an increase of 269% in deposits base and 268% increase in bank assets has increased the banks’ pre-tax profit by 9,991%. A deposit rate of 5.82% and inflation rate of 12% depicts that real rate of return (inflation adjusted) is actually -6%, whereas it was 3% in 2001. This means that the depositors have been forced to lose their money due to the negative returns.
1. Discuss in detail the three most appropriate measures to be taken by State bank of Pakistan in order to control or bring down the higher spread in Pakistani banking sector.
The state bank can do following:
- The deposit rate of National saving bank and the commercial banks should be increased.
- implementing monetary policies.
- determining Interest rates
- controlling the nation’s entire money supply
- the Government’s banker and the bankers’ bank (“lender of last resort”)
- managing the country’s foreign exchange and gold reserves and the Government’s stock register
- regulating and supervising the banking industry
- setting the official interest rate – used to manage both inflation and the country’s exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms
2. Discuss in details any two factors inducing this higher banking spread in Pakistan.
2. Low deposit rates in commercial banks.DOWNLOAD SOLUTION HERE