Interest rate spread determinant based on the interdependency relationship between a bank’s loan rate and time deposit rate

Abstract

This study analyzes the factors responsible for the lower net interest rate at commercial banks located in Indonesia, Thailand and the Philippines. Data were collected from 35, 10 and 13 commercial banks in Indonesia, Thailand, and the Philippines, respectively, from 2012 to 2020 using the Fixed effect model. The Simultaneous Equation Model was used to analyze the macroeconomic factors and banks’ specific characteristics towards Loan and Time Deposit rates. The result showed that macroeconomic factors, such as the inflation rate, significantly affect loan and time deposit rates in these countries. In Indonesia, bank competition should be reduced and banks’ stability should be higher to minimize Net Interest Margin Spread (difference between Loan Rate and Deposit Rate). In the Philippines, banks should increase their capital and liquidity. So, they will be more confident and prudent in lowering their NIM. Thailand’s banking industry has unique characteristics with high monopoly power. The bigger and greater the market share, the larger the interest rate spread on customers. Therefore, regulators in each country need to consider these important variables when making decisions on lowering the net interest rates by banks to enhance social welfare.

Tasa de interés de los créditos de consumo y recaudación del impuesto general a las ventas en Perú

“…These findings propose that regulators could consider intervening to ensure fair and reasonable rates, especially if the lack of competition facilitates the imposition of higher rates. This perspective is supported by the work of Nugroho et al (2022), who argue that regulators should take steps to compel banks to reduce interest rate variations.…”

“…Renke and Steennot (2020b) suggest that self-regulation alone, being voluntary, is rarely sufficient. Similarly, Nugroho et al (2022) point out that regulators should compel banks to reduce their rates, and Goldenberg Serrano (2020) considers implementing regulations to mitigate active overindebtedness. These points highlight the relevance of regulatory intervention to ensure the efficient functioning of the financial system.…”