IMPACT OF INTEREST RATE ON PROFITABILITY OF COMMERCIAL BANKS IN NEPAL

A Dissertation Proposal

 
 
Submitted to
Management Research Department
Gupteshwor Mahadev Multiple Campus, Pokhara
Tribhuvan University
 
 
 
In partial fulfillment of the requirements for the Degree of
Master in Business Studies (MBS)
 
 
Submitted by
Sangita Khatri
Campus Roll NO: 214/19
TU Registration: 7-2-781-32-2014
 
 
 
Pokhara
July, 2022
 
 
1 Background of the study
Banking sector of Nepal has revealed being very large and potential over the year.
Commercial bank occupies large space in banking and financial institutions industry in
Nepalese economy. Commercial bank plays important roles in the financial system in
Nepal. There is a considerable expansion in the profitability of banking sector
demonstrated by performance and stability indicators. For the stability of commercial
bank there should be sound profit margin. The Higher interest rate (IR) is the most
important factor for the sound profit margin. The difference between lending and
deposit interest rate is known as interest rate spread. Interest rate directly impact on
profitability of financial institution. No doubt, higher interest rate increases the
profitability and vice versa.
Commercial bank can increase their profit margins through higher lending rate and
lower deposit Rate. But bank do not charge too low rate on loan because the revenue
from the interest income will not be enough to cover the cost. On the other hand, they
cannot charge too high loan rate because they will not be able to keep the banking
relationship with the borrowers. Thus, Determination of the appropriate lending rates
usually becomes a major issue in banking industry (Poudel, 2018, p.12).
2 Research questions
The questions of this study are :
1. How the interest rates affect the profitability of Nepalese commercial banks?
2. Is there any relationship between capital adequacy ratio and profitability of
commercial banks?
3. Is there any relationship between liquidity and profibility of commercial banks?
3 objective of the study
The specific objective of this study are as follows:
1.To analyze the impact of interest rate on profitability of Nepalese commercial
banks.
2. To identify the relationship between capital adequacy and profitability of commercial
banks.
3. To identify the relationship between liquidity and profitability of commercial banks.
4 Hypotheses
Based on the research question, the following hypotheses will be used to validate the
test.
H1: There is the positive relationship between interest rate variable and bank
profitability.
H2: There is positive relationship between capital adequacy and bank profitability.
H3: There is positive relationship between liquidity and bank profitability.
5 Limitation of the study
1 .There are all together 27 commercial bank in the country, but this study do
not cover all the companies. Only7 commercial banks are considered for the
purpose of study. Therefore, inclusion of joint venture and non joint venture
banks in this study would provide more valid results.
2. This study covers only five fiscal years.
3. The reliability of this study depends upon the information provided by
concerned financial institutions and published data.
4. In this study for financial performance, only return on assets and return on
equity will be considered as dependent variables.
5. The study has only used the data of Commercial banks, it has not considered
the data of other depository institutions like development bank, finance
company, saving and credit cooperatives, micro finance etc.
6 Review of past studies
Author Topic Finding

Noreen et al. Interest rate changes and its This study found that, there
(2018) impact on the profitability of is optimistic and direct
Pakistani commercial banks. relationship among interest
rate and banks profitability.
Jui et al. (2020 Association between interest This study found that , there
rate changes and profitability is a positive relation between
of commercial banks of interest rate and profitability
Bangladesh. of commercial banks.

Oywoki et al. Market interest rate and This research found that
(2020) profitability of listed there was significant positive
commercial banks in Kenya. relationship with real,
nominal, interbank and bank
size with ROA.
7 Research framework
Independent variable Dependent variable
Interest rate Return on assets
Loan rate Return on equity
Bank rate
Deposit rate
Treasury bill rate
Reverse repo rate

Control variable
Capital adequacy
Liquidity
8 Research methodology
Research design Descriptive and casual comparative research design

Population & sample Total commercial bank of Nepal i.e. 27 commercial Banks.
sample – 7 Commercial Banks (5 joint ventures & 2 non
joint venture)
Sampling technique: Simple Random Sampling

Natural & source of data Quantitative in nature and source of data will be both
primary and secondary

Method of analysis descriptive statistics

Noreen, S., Liaqat, A., & Parveen, F. (2018). Interest rate changes and its
impact on the profitability of Pakistani commercial banks. International Journal
of Academic Research in Business and Social Sciences,
8(12),948–954.http://dx.doi.org/10.6007/IJARBSS/v8-i12/5088

Jui, S.N., Sakib,R.H.,&Rafsan, M.A.(2020). Association between interest rate