How Does Interest Rate Affect Bank Performance

1. INTRODUCTION

This paper shows the impact of interest rate, Capital Structure, Bank size, Profitability, liquidity Tangibility, Asset Growth Rate of banks on their performance. Many papers have already studied about the variables affecting the bank performance. Some studies have found that there is a strong relation between Interest Rate and bank performance. Some studies have also found that there is positive relation between Assets Growth Rate and ROE. Interest rate and Asset Growth Rate have a negative relationship with return on equity (ROE). Profitability have a significant positive effect on Return on equity (ROE) while Interest rate have a significant negative effect on return on equity(ROE) but Profitability is not significant at

And also the main reason of fluctuation and hurdles in economic development because of interest rate of money. And also creates unequal of distribution of wealth within the society as power of money in few hands. (Farooq 2012). Interest rate affects all sectors of all economy It has a major impact on banking sector because many countries have directly deal with money. The globalization is increasing so it has made efficiency as the most important factor of both financial and non-financial institutions and banking sector as the life of blood the modern trade of commerce. At the end of 1990 public sectors shared almost 90 percent of the total asset in banking sector. A high shares existed for deposits and investments. And when these are build these privatization commission was built in 1991. Normally interest rate is high in an economy. It will be control the inflation but other hand it has a negative impact on economy by slowing down the economy activates. Interest rate is most important factor for government and financial institutions to get more information about variables that can affect interest rate to fluctuate. Normally interest rate mean everything stated by state bank of Pakistan (SBP) funds rate to any of treasury bill yield to ten years fixed deposit

They evaluated the bank performance by checking the impact of macro variables on it by collecting data of 15 commercial banks. They took a period of 5 years from 2005 to 2009 for analysis. Data was collected from state bank of Pakistan. Data of gdp and inflation was collected from World Bank. Simple regression and OLS method was used for the analysis. Two hypotheses have been developed for analyzing bank’s profitability over specific determinants i.e., Hypothesis 1 states that microeconomic factors have significant impact on profitability. Whereas, hypothesis 2 states that external factors of the banks have significant impact on the profitability. The result shows that both hypotheses have accepted and have a significant impact on profitability of the Bank’s in