Impact of Volatility in Macroeconomic Factors on the Lending Behavior of Domestic and Foreign Banks in Pakistan

Abstract

This paper aims to determine the impact of variations in macroeconomic variables on the lending behavior of local and foreign banks in Pakistan. Fluctuations in economy affect the behavior of banks and other financial institutions. Positive signals regarding economy encourage the banks to lend more and vice versa. R-square value for the foreign banks was higher than that of local banks concluding that foreign banks are more affected by the macroeconomic indicators as compare to domestic banks. Percentage change in advances of local and foreign banks are studied as dependent variable while GDP, Inflation, Interest Rate, Money Supply and Exchange rate as independent variables. Seven years data (2005-2011) is analyzed using Ordinary Least Square (OLS) technique. Results indicated that interest rate is insignificant for domestic banks while GDP is insignificant for local banks' advances.