Determinates of interest rate spread in Nepalese commercial banks.

Abstract

The aim of this study is to investigate the determinants of interest rate spread of Nepalese commercial banks. The analysis of data was based on a sample of 12 commercial banks observed over the period 12 years (2009-10 to 2020-21). The models used in the study were correlation and linear regression analysis. This study has used ‘interest rate spread’ as dependent variable, while the independent variables are: Bank size, operating cost, liquidity ratio, credit ratio, inflation rate, and GDP. The estimated results of these regression models reveal that operating costs to total assets ratio, liquidity ratio(liquidity assets to total assets), and credit ratio( non- performing loans to total loans ratio) have significant positive impact on interest rate spread of the commercial bank in Nepal. However, bank size, inflation, and GDP have positively impact but low level significance on interest rate spread. Thus, this study concludes that the major determinants of commercial banks’ interest rate spread are: operating costs, credit ratio, and liquidity ratio in Nepalese perspectives. Keywords: Credit risk, Liquidity risk, Operating cost, Inflation, and GDP