Banking spreads rose 19 bps to 7.47% in 2009

[LahoreEstate]

KARACHI: The average banking spreads for the year 2009 increased by 19 basis points to stand at 7.47 percent giving rise to policy issues regarding the competition in, and efficiency of the banking sector.

According to the data released by State Bank of Pakistan (SBP), average spreads for 2009 were up against the average spreads of 7.29 percent recorded in 2008.

In 2009, average lending rates of banks operating in Pakistan rose by 149 bps to 13.98 percent as against 12.49 percent in 2008, while deposit rates increased by 131 bps to 6.51 percent as compared to 5.2 percent in 2008.

Experts said that lack of competition in the banking sector allows banks to maintain high spreads and extract above normal profits. This does not bode well not only for the overall efficiency of the banking sector, but also for its long-term sustainability.

It is pertinent to mention here that the Competition Commission of Pakistan (CCP) has termed the country’s banking sector as one of the most influential cartels.

Relatively higher exposure towards consumer financing, offering innovative product solutions tailored to the needs of customers, and technological advantages are some of the factors that help these banks in maintaining high banking spreads, explains the Financial Stability Review.

The SBP data shows that the banking sector spread for the month of December 2009, on the other hand, rose by 2 bps to 7.35 percent, up from 7.33 percent seen in November 2009.

Lending rates of all banks operating in Pakistan declined by 9 bps from 13.58 percent to 13.49 percent, which according to bankers, would be coming down further from the second quarter of 2010 onwards, as the SBP is expected to ease its monetary stance.

Deposit rates for the month dropped by 11 bps to 6.14 percent, which are expected to consolidate going forward.

Although the spreads rose by 19 bps in 2009, they are expected to contract in 2010, as expectations of monetary easing will bring the KIBOR down. Deposit rates on the other hand are expected to consolidate in 2010, as most of the deposit mix readjustment has already taken place. However, any change in the minimum deposit floor requirement by the SBP could lead to a fall in rates. staff report

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