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asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
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Published: 06 June 2022

The Role of Financial Structural Factors in Retail Rate Adjustment: Evidence from Sri Lanka

Antonette Fernando

Central Bank of Sri Lanka, Sri Lanka

asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, management journal

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doi

10.31014/aior.1992.05.02.422

Pages: 153-171

Keywords: Bank Retail Rates, Financial Structural Factors, Interest Rate Pass-Through, Monetary Policy

Abstract

This paper examines the interest rate channel of monetary policy transmission. It assesses the impact of banking structural factors on commercial bank pricing decisions and their pass-through in Sri Lanka. The empirical analysis uses aggregate monthly interest rates data from January 2008 to December 2018, a total of 132 observations. The findings suggest that the interest rate pass-through is significant overall, but incomplete. The credit quality, operational efficiency and excess liquidity play essential roles in explaining the adjustments of the bank lending and deposit rates. Non-performing loans increase the lending rate, and this result is robust to different combinations of the control variables. This suggests that banks with higher proportions of non-performing loans attempt to pass their credit losses on to customers. Further, bank inefficiency is passed on to customers in the form of lower deposit rates and excess liquidity in the banking system, both of which have a negative effect on the interest rate adjustments of both lending and deposit rates. A puzzling negative relationship is observed between the lending rate and operational inefficiency. The findings of this paper support the claim that banks in Sri Lanka take into consideration their structural factors as well as the monetary policy rates when setting the lending and deposit rates.

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