Interest rate in Oman: is it fair?

Humanomics ◽  
2015 ◽  
Vol 31 (3) ◽  
pp. 330-343 ◽  
Author(s):  
Saeed Al-Muharrami
Keyword(s):  
Interest Rate ◽  
Banking System ◽  
Weighted Average ◽  
Operating Costs ◽  
Loan Loss ◽  
Reserve Requirement ◽  
Content Type ◽  
Interest Income ◽  
Income Statement ◽  
Interest Margin

Purpose – The purpose of this study is to try to answer whether the banking system in Oman is fair for both depositors and entrepreneurs. Design/methodology/approach – The interest margin decomposition is based on the methodology proposed in Randall (1998). The income statement of banks defines profits before taxes (P) as interest income (II), plus non-interest income (NII), minus interest expense (IP), minus operating costs (OC) and minus provision for loan losses (Prov). After rearranging this identity, the net interest revenue can be expressed as follows: II – IP = OC + Prov + P – NII. The above expression decomposes the margin into the following cost and profit components: reserve requirement costs, operational costs, loan loss provision costs, profitability and non-interest income (with a negative sign). Findings – A trend analysis of commercial banks’ interest rate spreads in Oman exposes the following facts: First, the implicit interest margin is relatively small (in the neighborhood of 1 percentage point); second, profits constitute a substantial proportion of the margin; third, the share of operating costs in the margin has been broadly constant over time; fourth, reserve requirement costs have been reduced following the decline of the reserve requirement ratio; and fifth, the weighted average interest rate on deposits base is lower than the rate of inflation. Originality/value – This work is original.

The interrelationship between net interest margin and non-interest income: evidence from Vietnam

2017 ◽  
Vol 13 (5) ◽  
pp. 521-540 ◽  
Author(s):  
Tu DQ Le
Keyword(s):  
Negative Impact ◽  
Rank Order ◽  
Banking System ◽  
Policy Makers ◽  
Content Type ◽  
Interest Income ◽  
Net Interest Margin ◽  
Bank Managers ◽  
The Impact ◽  
Interest Margin

Purpose The purpose of this paper is to investigate the interrelationship between non-interest income (NII) and net interest margin (NIM) in the Vietnamese banking system between 2006 and 2015. Thereafter, the impact of NII on risk-adjusted returns is also examined. Design/methodology/approach Various analysis techniques are used to achieve the research objectives. Findings The findings show a negative two-way link between NII and NIM, thus supporting the subsidisation hypothesis. Furthermore, NII is found to have a negative impact on risk-adjusted returns. When observing this relationship in sub-samples, the findings indicate that the negative impact of NII on risk-adjusted returns still holds in the first subsample (2006-2011). The coefficient of NII becomes positive but not significant for the subsequent period (2012-2015). In addition, the Spearman rank-order correlations of returns on assets and NII for both sub-samples are negative. Together, the author concludes that there are no diversification benefits in the Vietnamese banking system. Practical implications The evidence suggests a trade-off between non-interest activities and traditional lending ones. In addition, the findings demonstrate that the Vietnamese banks may use NIIs to expand leverage and herd by coordinating NII strategy during the economic downturns. Thus, the banking system may be exposed to a greater risk. The research has implications for bank supervisors, policy-makers and bank managers. Originality/value This study is the first attempt to investigate the interrelationships between net NII and NIM in the Vietnamese banking system.

scholarly journals A FINANCIAL ANALYSIS OF RESWITCHING

2021 ◽  
pp. 220-244
Author(s):  
Rafael García Iborra
Keyword(s):  
Interest Rate ◽  
Business Cycle ◽  
Interest Rates ◽  
Inverse Relationship ◽  
Financial Analysis ◽  
Banking System ◽  
Weighted Average ◽  
Business Cycle Theory ◽  
Natural Level ◽  
The Interest Rate

The classical Austrian Business Cycle Theory (ABCT) is based on an inverse relationship between the so-called Average Period of Production (APP) or ‘roundaboutness’ and the interest rate. According to Böhm-Bawerk (1884 [1891]), the APP is the weighted average time that a unit of labor is locked up in the production process1; moreover, there is a positive relationship between savings (the ‘subsistence fund’) and the APP: the higher the latter the higher the former, which implies an inverse relationship between interest rates and the APP. Thus, a lower interest rate will lead to a higher APP ceteris paribus. Hayek (2008) based his Hayekian triangles on Böhm-Bawerk’s work: a lower (higher) interest rate leads to a more (less) rounda- bout structure of production, increasing (decreasing) the APP. Including Mises’s (1921) business cycle theory into the analysis, whenever the interest rate is pushed lower than its ‘natural level’, either by the central bank or the banking system, there is an unsus- tainable extension of the APP that will generate an economic boom; the crisis will irremediably follow, as the APP will pull back towards its natural level. From this brief characterization of the ABCT, it is easy to notice the key role of the inverse relationship between interest rates and roundaboutness; without it, there is no connection from changes in interest rates and roundaboutness, and the ABCT falls apart. The reswitching of techniques is precisely a counterexample to that relationship, as it claims there are situations in which lower interest rates do not lead to more roundabout productive struc- tures. The organization of this paper is as follows: the next section describes the reswitching of techniques as stated by Samuelson (1966) and the implication for the classical ABCT, based on a phys- ical measure of roundaboutness; section 3 analyzes the alternative of applying corporate finance to the ABCT following Cachanosky and Lewin (2014). Section 4 is a financial analysis of Samuelson’s example, argues why modified duration should replace Böhm- Bawerk’s APP as a measure of roundaboutness, and shows why it does not represent a paradox to the ABCT when the financial approach is used. Sections 5 and 6 address the question from two additional perspectives: a neoclassical with fully flexible prices but fixed techniques and the Austrian related dynamic efficiency.

Determinants of interest rate in emerging markets

2018 ◽  
Vol 14 (3) ◽  
pp. 267-290 ◽  
Author(s):  
Sulait Tumwine ◽  
Samuel Sejjaaka ◽  
Edward Bbaale ◽  
Nixon Kamukama
Keyword(s):  
Interest Rate ◽  
Emerging Markets ◽  
Emerging Market ◽  
Equity Capital ◽  
Annual Reports ◽  
Data Set ◽  
Reserve Requirement ◽  
Content Type ◽  
Net Interest Margin ◽  
Negative Effect

Purpose The purpose of this paper is to investigate the determinants of interest rate in emerging markets, focusing on banking financial institutions in Uganda. Design/methodology/approach Using the net interest margin model, interest rate was estimated by applying a panel random effects regression method on 24 banks, while controlling for bank-specific factors, industry and macroeconomic indicators. Data were drawn from annual reports provided by Bank of Uganda Depository Corporation survey from 2008 to 2016. Findings The results indicate that liquidity, equity capital, market power and reserve requirement have a positive effect on interest rate. The study further finds that operational efficiency, lending out ratio, concentration, public sector borrowing and private sector credit have a negative effect on interest rate. However, credit risk does not influence interest rate. Research limitations/implications Studied banks are grouped in one panel data set; future studies would focus on the differences in banks and establish how these differences affect interest rate. Future study would also focus on how the determinants of interest rate in Uganda are compared with those of other banks in other emerging market countries. Practical implications Bank managers need to take interest in equity mobilization because it is a reliable and cheaper source of funding bank operations. Banks should emphasize efficient operations to reduce on the cost of doing business. Government should utilize funds borrowed from banks in efficient ways to improve economic growth. The central bank should minimize the use of reserve requirement as a means of controlling money in circulation. Originality/value This is the first paper that uses annual report data from several banks and periods to investigate the determinants of interest rate in an emerging country.

Optimal bank interest margin under capital regulation: bank as a liquidity provider

2019 ◽  
Vol 11 (2) ◽  
pp. 158-173 ◽  
Author(s):  
Fu-Wei Huang ◽  
Shi Chen ◽  
Jeng-Yan Tsai
Keyword(s):  
Default Risk ◽  
Banking System ◽  
Capital Regulation ◽  
Knock Out ◽  
Content Type ◽  
Loan Rate ◽  
Negative Effect ◽  
Demand Deposits ◽  
Option Model ◽  
Interest Margin

Purpose This paper aims to develop a barrier cap option model, i.e. a cap option model where default can occur at any time before the maturity date, to evaluate the equity and the default risk of a bank. The model implies the bank as a liquidity provider that one institution carriers out both lending and deposit-taking functions under the same roof. This paper studies the impacts of demand deposits and capital regulation on the optimal bank interest margin, i.e. the spread between the loan rate and the deposit rate. Design/methodology/approach This paper characterizes the bank’s equity value by a barrier cap option framework. In the model, default can occur at any time before the maturity and loan markets are imperfectly competitive. Findings This paper has two main results. First, increases in demand deposits reduce the bank’s interest margin and further increase the bank’s default risk. The negative effect on the optimal bank interest margin which ignores the barrier leads to significant overestimation; the positive effect on the default risk which ignores the barrier leads to underestimation. Second, the same pattern of capital regulation as previously applies. Capital regulation as such makes the bank more prone to loan risk-taking, thereby adversely affecting the stability of banking system. Originality/value This paper reintroduces the knock-out value and bank interest margin determination within a synergy banking function to the cap option model. The results confirm the need to model bank equity as a barrier cap option and demonstrate its usefulness in capital regulation.

TINGKAT SUKU BUNGA PINJAMAN DAN KINERJA KEUANGAN PERBANKAN: STUDI KASUS PADA BPR PT PRISMADANA

2011 ◽  
Vol 6 (2) ◽  
pp. 175
Author(s):  
Sarah Usman
Keyword(s):  
Interest Rate ◽  
Financial Performance ◽  
Secondary Data ◽  
Financial Statements ◽  
Interest Income ◽  
Net Interest Margin ◽  
Margin Analysis ◽  
Interest Margin

The purpose of this study is to analyze the role of loan interest and its implication towardsRural Bank’s financial performance. Database collected from primer data is based onobservation, meanwhile secondary data from Rural Bank’s financial statements during2006-2008 period. This study based on net interest margin analysis. The role of loan interestand it’s implication proxied by net interest income indicator.This study shows that anincrease in interest income (Net Interest Income) at Rural Bank due to an increase of it’slending activities for five years. Thus, loan interest income has important role on theincreasing perfomance of PTPrismadana rural bank's finance.Keywords: Interest Rate, Financial Performing, BPR

Dynamic lag structure of deposits and loans interest rates and business cycles formation

2017 ◽  
Vol 25 (2) ◽  
pp. 114-132
Author(s):  
Bijan Bidabad ◽  
Abul Hassan
Keyword(s):  
Interest Rate ◽  
Business Cycles ◽  
Interest Rates ◽  
Banking System ◽  
Real Economy ◽  
Short Term ◽  
Structural Dynamic ◽  
Content Type ◽  
The Real

Purpose This paper aims to study the structural dynamic behaviour of the depositors, banks and investors and the role of banks in the business cycles. The authors test the hypothesis: do banks’ behaviour make oscillations in the economy via interest rate? Design/methodology/approach The authors dichotomized banking activities into two markets: deposit and loan. The first market forms deposit interest rate, and the second market forms credit interest rate. The authors show that these two types of interest rates have non-synchronized structures, and that is why money sector fluctuation starts. As a result, the fluctuation is transferred to the real economy through saving and investment functions. Findings The empirical results show that in the USA, the banking system creates fluctuations in money and real economy, as well as through interest rates. Short-term interest rates had complex roots in their characteristic, while medium and long-term interest rates, though they were second-order difference equations, had real characteristic roots. However, short-term interest rates are the source of oscillation and form the business cycles. Research limitations/implications The authors tested the hypothesis for USA economy, while it needs to be tested for other economies as well. Practical implications The results show that though the source of fluctuations in the real economy comes from short-term interest rates, medium- and long-term interest rates dampen real economy fluctuations and also work as economic stabilisers. Originality/value Regarding the applied method, the topic is new.

Determinants of bank margins in a dual banking system

2017 ◽  
Vol 43 (6) ◽  
pp. 630-645 ◽  
Author(s):  
Siew Peng Lee ◽  
Mansor Isa
Keyword(s):  
Credit Risk ◽  
Market Share ◽  
Emerging Market ◽  
Banking System ◽  
Operating Costs ◽  
Islamic Banks ◽  
Content Type ◽  
Conventional Banks ◽  
Interest Payments ◽  
Conventional And Islamic Banks

Purpose The purpose of this paper is to determine of bank margins for conventional and Islamic banks in the dual banking system in Malaysia. Design/methodology/approach The study uses unbalanced panel data for 20 conventional banks and 16 Islamic banks over the period 2008-2014. The dynamic two-step GMM estimator technique introduced by Arellano and Bond (1991) is applied. Findings The results suggest that there are significant similarities with minor differences in terms of factors determining bank margins between conventional and Islamic banks in Malaysia. The margins for conventional banks are influenced by operating costs, efficiency, credit risk, degree of risk aversion, market share, size of operation, implicit interest payments and funding costs. For Islamic banks, the margin determinants are found to be operating costs, efficiency, credit risk, market share and implicit interest payments. This means that more factors influence the margins in conventional banks compared to Islamic banks. Although bank diversification activities have increased in recent years, their impact on bank margins is minimal. Practical implications The results suggest that improving operational costs, operational efficiency and credit risk management, and minimising implicit interest payments would be the best strategy to enhance the bank margins for both conventional and Islamic banks. The results also have important policy implications on the necessity to expand the size of Islamic banking in Malaysia. Originality/value There are relatively few studies concerning determinants of bank margins in emerging markets. The present study adds to the literature by presenting evidence from Malaysia, an emerging market with a dual banking system. This allows us to explore the similarities and differences between conventional and Islamic banks in Malaysia in respect of determinants of the margins.

China data doubts may muddle decision-making

2015 ◽  
Keyword(s):  
International Economic ◽  
Decision Making ◽  
Interest Rate ◽  
Government Policy ◽  
External Pressure ◽  
Risk Profile ◽  
Reserve Requirement ◽  
Content Type ◽  
Apparent Stability

Significance This was slowest pace since the first quarter of 2009, but still exceeded most forecasts. The apparent stability of official GDP data even when many other indicators are weak has revived the long-running debate about the reliability of Chinese data. Impacts Further monetary stimulus is likely if growth disappoints, both as reserve requirement ratio cuts and interest rate cuts. Uncertainties about the economy and government policy will multiply, raising the country's risk profile. External pressure may build for Beijing to be more transparent and informative given China's international economic relevance.

Determinants of loan loss provisions of commercial banks in Malaysia

2018 ◽  
Vol 16 (1) ◽  
pp. 24-48 ◽  
Author(s):  
Mohd Yaziz Mohd Isa ◽  
Yap Voon Choong ◽  
David Yong Gun Fie ◽  
Md. Zabid Hj Abdul Rashid
Keyword(s):  
Commercial Banks ◽  
Banking Sector ◽  
Panel Data Analysis ◽  
Faithful Representation ◽  
Loan Loss ◽  
Content Type ◽  
Independent Variables ◽  
Loan Loss Provisions ◽  
Interest Income ◽  
Net Profit

Purpose This paper aims to derive determinants of loan loss provisions (LLPs) of commercial banks in Malaysia. Design/methodology/approach A single-stage panel data analysis multiple regression model that contains a mixture of quantitative and qualitative elements is used. The LLPs is a dependent variable or regressor, and non-performing loan (NPL), interest income, net profit, loans and advances and gross domestic product (GDP) are the independent variables or regressor/explanatory variables. The moderating variable is “credit risk management” (CRM) and the intervening variable is “relevance and faithful representation”. Findings This paper suggests in LLPs, NPLs, interest income, loans and advances, net profit and GDP, as well as the moderating effect of CRM and the intervening effect of relevance and faithful representation, are determinants of the LLPs. The moderating variable CRM strengthens the relationship between the independent variables and the dependent variable. The intervening variable “relevance and faithful representation” brings about a more accurate reporting on the levels of the LLPs. Practical implications The association of the factors is investigated further to detect possible effect of multicollinearity and research to better understand how banks manage their risk as the current investigation is limited to banks in Malaysia. Social implications Loan loss provisioning issues of commercial banks in Malaysia are challenges for both regulators and the banking industry owing to the implementation of several new measures, the convergence with internationally accepted accounting standards and differences in loan grading and applications of different loan loss provisioning standards. Because of these challenges, Bank Negara Malaysia (the Central Bank of Malaysia) has tightened its supervision of commercial banks to ensure that banks are sufficiently and adequately provisioned. The banking sector plays a significant role, and it is important that it is resilient in the face of potential sources of systemic risk. And, like in other major ASEAN economies, the Malaysian’s financial system remains largely bank-dominated. Originality/value This study discovers whether Malaysian banks are sufficiently provisioned for the regional financial integration under the ASEAN Capital Markets Forum (ACMF) by the end of 2015, where several initiates have been initiated, including the harmonization of standards to encourage greater intra-regional investment flows and transactions and continued provisions of the much needed funds by the region’s private sectors.

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