Monetary Policy

Topics: Monetary policy, Central bank, Interest rate Pages: 6 (3517 words) Published: March 1, 2015
J. Basic. Appl. Sci. Res., 4(8)119-124, 2014
© 2014, TextRoad Publication

ISSN 2090-4304
Journal of Basic and Applied
Scientific Research

The Impact of Monetary Policy on Financial Performance: Evidence from Banking Sector of Pakistan
Rashid Zaman*, Muhammad Arslan, Muhammad Sohail, Dr Rashida Khatoon Malik Department of Management Sciences, Bahria University Islamabad, Pakistan Received: April 29, 2014
Accepted: June 27, 2014

Interest rate an important indicator of monetary policy always has major impact on financial sector performance. The purpose of this paper is to enlightened the monetary policy effect on banking sector stability and performance by investigating the casual relationship between interest rate imposed by state bank of Pakistan and bank financial performance taken as ROA and ROE. Highlighting the importance of monetary policy in banking sector, this study shall focus in depth over its impact on performance of banking industry of Pakistan by studying monetary transmission over the past five year (2007-2011), using interest rate as its measure. Using correlation analysis followed by ordinary Least Square regression carries the empirical analysis of the study. Firm size is taken as control variables for the study as firm size have significant impact on financial performance of banks. The finding of study reveal that interest rate taken as measure for monetary policy has significant inverse relationship on firm financial performance measured, which is measured by ROA and ROE. KEY WORDS: Monetary Policy, Interest rate, Return on assets, Return on Equity 1. INTRODUCTION

Monetary policy has the significant contribution to sustainable economic development by enhancing the performance of the banks. Monetary policy is the actions which undertake to influence the cost of money and credit and their availability. In Pakistan the State Bank of Pakistan (SBP) is responsible for maintaining the monetary policy. In case of open economy it is assumed that monetary policy affects the economy and primary objectives of monetary policy through two important channels which are interest rate and exchange rate. The first channel is very important on banking prospective because the change in official interest rate effect the market rate of interest both for short term as well as long term interest rate and due to this consequence the affect of interest rate on banking sector is sever. To cope with this issue the firm size matters a lot. Bank with larger size will manage it easy than the lower once.

Monetary policy in particular is of critical important in banking sector as this sector directly hit from it. Banking system is nothing but just attracting the depositor and investing their money to make further profit .During the mid 2000 era the interest rates by SBP were low and supply in economy has risen at that time. So it gave general public a chance to borrow from bank at low rates and invest money for profit. Bank shifted their strategies to asset side lending/investing such as enhancing credit limit of customer which ultimately has the positive impact on the performance of the bank. Similarly on the other hand sudden sharp turn in interest rate will affect the bank performance and this study will investigates the relationship between monetary policy and its affect on banking performance.

The banking system is an integral part of an economy's financial sector. This sector perhaps contributes the most significant amounts of money supply in a country. 'Bank' itself is a term which literally means to store or reserve. The concept has in fact been present since centuries when trusted people or parties of a tribe, group or any other form of community were entrusted to safeguard the people's precious items or piece of property. These entrusted individuals used to perform a similar function as that of a bank, that is; to reserve or look after the wealth of another while...

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