Determinants of Interest Rate Spreads in Malaysia

Chong, Huei Dien (2022) Determinants of Interest Rate Spreads in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

The profitability of financial institutions is associated with an increase in interest rate spreads. However, Malaysia is one nation that has for many years remained on the bottom list of economies with low-interest rate spreads. Interest rate spread is the interest rate charged by banks on loans to prime customers minus the interest rate paid by commercial or similar banks for demand, time, or savings deposits. The study sought to determine the determinants of interest rate spreads in the commercial financial sector of Malaysia. The data for Malaysia's interest rate spreads remain active status in CEIC and is reported by the World Bank. A panel regression data analysis using EViews software is employed for the time period from 1969 to 2018. In this study, the dependent variable of interest rate spreads and the six explanatory variables, namely the economic growth, inflation rate, exchange rate, broad money M2, domestic credit borrowing from banks, and trade openness are analyzed and a model is defined according to prior studies. Through panel tests on collected data, the results reveal that among the six independent variables, economic growth is positively significant related to interest rate spreads in Malaysia while the exchange rate, broad money M2 and domestic credit borrowing from banks are shown to be negatively related to interest rate spreads. Going forward, interest rate spreads have always been one of the most important and significant economic issues in different countries of the world. The study concluded that it is indeed the responsibility of bank management, central bank regulating bodies, and government policymakers to devise and implement strategies for widening interest rate spreads to meet regional and global average magnitudes.