Banking Spreads

Banking is a unique business concern which makes their money by utilizing the money of others. It channelizes the spare money of their depositors which is obtained at lower rate of return to the slots where it is required at higher rate of return and keeps the percentage of difference in the rate called the banking spread. The banking spread has increased during the last couple of years and touched the historically high percentage i.e. 7.78 % and remained between the averages of 7.30 % to 7.50% ( the weighted average lending rate of banks are 14.66% while average deposit rates are 6.88%). In the competuition of enjoying high spreads, foreign banks leading ahead having spread more than 8 % because they are pioneers in introducing consumer banking in Pakistan and this segment pays highest rate of return as compare to other banking products which push their spreads higher than other banks.

With the rise in Interest Rates borrowing cost will rise so borrowers will pay more but depositors will not gain the benefits of such rise but banks are the real beneficiaries. This practice keep the price of the credit high which also give rise to the price level i.e. Inflation. On the other hand SBP has adopted tight monetary policy to slow down the inflation and to reduce the trade deficit by lowering discount rates but high banking spreads still makes the credits costly for business concern which not only diminishes the fruity effects of monitory policy but also creates hinder nesses in economic and business growth.

Banks are impelled to increase their spreads to maintain their profitability when the intermediation cost increases. Moreover, by not giving incremental increase to the rates of retune of the depositors, banks are deviating from their true role of financial intermediation. High spreads also exhibit the market frictions and banking inefficiencies. This article attempts to focus these factors which kept banking spreads consistently high;

Cost of Funds: The cost of...