Competitive Structure and Bank Loan Rate in Pakistan’s Banking Industry

Abstract

This paper estimates the relationship between loan price and the number of banks in the corporate loan markets of Pakistan. An original data set is constructed that includes loan price (interest rate) and market structure (number of banks) in more than 300 geographical markets across Pakistan. Variation in market structure (number of banks) along with variation in borrower and lender characteristics is employed to identify the factors that affect interest rates in loan markets. The findings based on regression result show that a competitive structure influences market price as loan rates decline when the number of banks increase in a market. Although the statistical evidence goes in favour of the structure conduct hypothesis, the findings are not robust across various functional forms. The detailed analysis of the Credit Information Bureau data and institutional details documented in this paper will be a useful reference for further research on the Industrial Organisation of Banking in Pakistan. JEL Classifications: L10, L11 Keywords: Price-concentration, Loan Price, Industrial Organisation, Banking