Micro and Macro Economic Variables which Effects the Profitability of Banks in Pakistan

Abstract

Banking sector is one of the most important aspects of a nation’s economy. Bank get deposit from considerable num of individuals give loans on interest. These factors classified into macro and microeconomics variables. Microeconomic variables pertain to aspects which impact individual or household behavior within the given country. Macroeconomic variables refer to things which impact the entirety of the economy, this includes things like the gross domestic product of the country, its rate of inflation, the repurchase and reverse repo rates of the central bank of the country. There are some issues which are involved in movements of macro and microeconomic variables. First is inflation, control inflation is benefit for economy. Increases in inflation result in simultaneous increases in interest rates, and pushes the cost of borrowing up. This is because the value of money ends up decreasing as prices rise during inflation. Second is interest, when interest rates are raised, the cost of borrowing goes up for businesses. Third is monetary policy also big determinants of the kinds of policies that banks are able to pursue within a given country. For instance, if the central bank requires commercial banks to maintain a high level of cash reserves, it results in them having more and more capital get locked up without being put to any productive use. Repo rates being too high is also an issue, the cost at which banks would be borrowing the said funds rises considerably. The impact of this is that banks too end up having to raise interest rates within the economy, in order to remain profitable. There are some effects of micro and macroeconomic variables on the Pakistani banking sector. Impact of inflation on Pakistani banking sector is the first effect. Average rate of inflation in Pakistan is 7.82% which is large and dangerous for economy. If business man decreases the value of cash, the inflation rate increases in result interest rate also increase. This is harmful for the economy. If the inflation rate is 2-4%, this is good for economy, banks and interest rate. Secondly, the State Bank of Pakistan’s interest rate should be considered in this regard as well. The average rate of interest in Pakistan is kept around 7-8% which is considerable high. Thirdly, the relation between growth in GDP; that is, economic growth, and the growth of the financial sector ought to be considered. Fourthly, the level of rise in household income, and the demand for savings accounts, loans, etc. should be considered from a micro economic perspective. There are some suggestions and recommendations for the banking sector of the Pakistan. Banking sector work 95% in Pakistan economy, most of the businesses in the country are small and medium sized which take loans from bank to run business. Firstly, microfinance is important for economy growth. Banks should have to give loans to run business on low interest rate so the economy of country increases Secondly, it is important for banks to ensure that their interest rates are kept in tandem with the cost of equity, and the kinds of inflationary pressures that might be seen in the nation at any given point of time. Bank have to give loan according to the income of person. Central bank has to control the inflation rate of the country. Interest rate should be moderate. Government have to make good policies for recovery of loans. Bank loss is not only money loss. It also effects bank attitude and economy of the country. It shall be important for these banks to make retail loans available at competitive rates, instead of inordinately raising the interest rates on the same.