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December 18, 2011

Pakistan’s banking spreads not highest in world: SBP


December 18, 2011

KARACHI: The State Bank of Pakistan (SBP) has rejected the perception that the country’s banks enjoy the highest spreads in the world.
“Pakistan’s ranking turned out to be 69 among 122 countries: not even in the list of top 50 countries with high spreads,” the SBP said in its Financial Stability Report for the first half of 2011 released recently.
“In sum, it can be safely concluded that the banking spreads in Pakistan are not the highest in the world,” it said.
The banking spreads can be defined as a gap between lending and deposit rates.
The SBP said that usefulness of cross-country analysis of the banking spreads is generally undermined by a number of factors, including differences in the level of financial development, regulatory environment, ease of doing business, charges of financial services, definitional issues, etc.
“In spite of these limitations, it is a popular perception that the banks in Pakistan enjoy the highest margins in the world,” it said.
Being the regulator and supervisor of the banking sector, the central bank has been vigilant of these issues, the report said, and explained that it is evident from the imposition of minimum five percent rate of return on savings deposits from June 1, 2008 to date, and detailed analysis of the banking spreads in the SBP flagship publication.
The SBP said that the banks alone cannot control their margins because it has multiple factors.
“Industry-specific and macroeconomic factors create an operating environment for the banks, which has strong bearing on the banking spreads,” according to the report.
The central bank identified major components for analysing spreads, which included structure of bank deposits, impact of non-performing loans; administrative expenses; cash reserve requirements; interest rates; and taxation.
It said that the changes in the interest rates along with a positive gap between interest bearing liabilities (deposits and borrowing) and

earning assets also impact the banking spreads.
The analysis provided that earning assets of the commercial banks are less than their interests bearing liabilities, the report said. “It implies that in an increasing interest rate scenario, a rise in average interest on earning assets must exceeds the rise in average returns on interest bearing liabilities, even if pass-through of market interest rates to retail rate is 100 percent: ultimately pushing up the banking spreads,” it added.
The central bank report said that the overall economic activities play an important role in determining the banking spreads.
Specifically, strong GDP growth not only affects the supply of loan-able funds for the commercial banks, it also favourably impacts the banking system by strengthening repayment capacity of the borrowers.
Negative association between the non-performing loans of the banking system and real GDP growth is well documented in the SBP documents, the report added.

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