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The Effect of Determining and Measuring Interest Rates

Banks can earn returns to the shareholders through managing and accepting risks and this includes the risk that changes in the interest rate may narrow the interest that is spread between the assets and liabilities (Fabozzi, Mann, & Choudhry, 2003). Additionally, banks are most prone to loses caused by borrower defaults and credit risk is a dominant risk to most banks (Sanjay, Nawalkha, & Natalia, 2005). Commercial banks therefore need to apply advances in technology and use newly introduced financial products to provide efficient ways in which the interest rates and credit deposits can be increased or decreased (Moorad 2004).

Nevertheless, in the wake of excessive competition and volatile economic conditions in the global financial market, several banks try to overcome these challenges through devising newer banking strategies especially on new financial products and new technologies (Walsh, 2003). Consequently, the interest rates of banks are perceived to hike excessively and this discourages the demand of credit from the private sectors. The lack of credit demand decreases capital flow and this means that the commercial banks will become unproductive as far as contributing to the country’s economic development is concerned.

The only way to ensure productiveness is through the banks developing strategies in

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which the interest rate can be determined so that it is not excessively high (William, B. & Melvin, 2008). There is also need to improvise tools that can measure the same to ensure that the right rate is applied with each transaction. The determined and measured interest rate should be one that allows the bank to make profit as well as encourage the request of credit from clients.

Moreover, this should also apply to the measurement and determination of the volume of credit deposits. Credit deposits should be in an amount that the economic condition of the bank can handle such that the bank does not experience longer periods of credit as compared to those of returns (Gopalsamy, 2006). This means that banks should develop effective credit information systems that will aid enable the banks to advise clients appropriately on the kinds of credit to apply for, and the maximum amount that customers can deposit (Scott, 2003).

Libya commercial banks however, lack most of modern facilities that can assist in interest rates and volume of credit deposits determination and measurement (Goldsbrough, 1996). The Libya banking sector features low financial development and productivity as compared to most countries in the Middle East and North Africa regions (MENA). According to Creane, Goyal, Mobarak, and Sab (2003), Libya’s poor financial development is caused by the presence poor institutional environment, and poor development of the non-bank financial sector.

Most MENA countries try to implement a monetary policy, in which there is a free determination of the interest rates, use of monetary policy tools that are indirect, and existence of government securities (Rabin, & Stevens, 2002). However, Libya and most of the countries in the region lack secondary markets for government securities and this limits the broad access market operations by the Central Bank (Amel, 2001; Otman & Karlberg, 2007). Therefore, Libya rarely follows a comprehensive framework for designing and conducting the monetary policy.

Lack of productivity in the Libyan commercial banks is characterized by underdevelopment, insufficient profitability, and inefficiency in carrying out the services. Furthermore, the equity ownership by the government is over 90 percent and there are also policies that hinder privatization of the banking sector (Porta, Lopez-De-Silanes, & Shleifer). Currently, part of Libya’s banking sector consists of the Central bank of Libya, 5 commercial banks in the public sector, and only one commercial bank in the private sector.

The Libyan Central bank whose objective is to maintain money stability in the country is 100 percent owned by the state (IMF, 2006). The banks in the public sector dominate and face government and political interference in credit allocation and thus feature significant problems like liquidity and losses, the interest rate is widely spread, and also, there is lack of modern skills in banking and financial aspects. Other than infrastructural and skills deficit, Libya also faces challenges in international relations and this discourages foreign investment (Vandewalle, 2006).

Background Would the employment of instruments to measure interest rates and volume of credit deposits increase the productivity of Libya banks? Libya has one of the least developed banking services in the global scene as far as the institutional structure, and banking environment is concerned (Creane, Goyal, Mobarak, and Sab, 2003). Not only does the government still control the shares of majority of the commercial banks but there is also a serious lack of modern skills and competitive knowledge that can help banks achieve success in the current volatile economic environment.

There is need to carry out a study which will identify whether the measurement and determination of interest rate and volume of credit deposits will improve the productivity of the commercial banks of Libya. The findings of this research will add to the knowledge in the scholarly work concerning ways in which commercial banks can increase productivity. The study will benefit academic scholars in that the findings can be taught to prospective banking practitioners. The application of the findings will benefit Libya banking sector and that of other emerging economies with similar challenges.

Financial practitioners should use the findings of the result to establish strategies that can assist the Libyan commercial banks increase productivity. Research problem This research will discuss the impact of determining and measuring interest rates and volume of credit deposits on the productivity of Libyan commercial banks. Libyan commercial banks face the challenge of underdevelopment and this reduces the economic capability of the country because banking sectors contribute significantly to economic development. Questions of research 1.

How can the measurement and determination of interest rates and volume credit deposits affect the productivity of Libyan banks? 2. What is the productivity rate of the Libyan commercial banks when compared to other banks in the region and the world? 3. How do the Libyan banks measure productivity in the sector at the moment? 4. In what ways will the banking sector of Libya remain productive? Significance of study The significance of the study is inn demonstrating the effect that measurement and determination of interest rates and volume of credit deposits can have on the productivity of the commercial banks in Libya.

Many banks nowadays charge various kinds on interest rates to the emerging new financial products. Additionally, the volume of credit deposits for particular products continues to increase as banks seek way s to sell the new financial products. The objective of many banks is to look for means to survive the harsh economic environment as well as overcome competition. However, depending on how the interest rates are determined and credit deposits controlled banks can make good profit or risk making loses.

This research may be the first of its kind to address specific financial challenge with an orientation to a particular country of an emerging economy. Determination and measurement of interest rates and volume of credit deposits as a way of enhancing productivity in the banking sector is an understudied are in the financial studies. As a matter of fact, many commercial banks continue to lose business with the perception that the rates of interests charged are too high.

Moreover, in the effort to increase capital flow, many commercial banks encourage borrowing from clients and sometimes accumulation of the debtors and inability of most of them to return the loan in time exposes the commercial banks to loses caused by credit risk. There is need to study the effect of measuring and determining the interest rates and volume of credit deposits so as to find out if there is a positive or negative impact on the banks’ productivity. The study will be an eye-opener to bank practitioners and academicians as it seeks to contribute to the now growing body of financial challenges in emerging economies.

Methodology i. Design A quantitative survey of the Libyan commercial banks will be done to establish if the measurement and determination of the volume of credit deposits and interest rates can have a positive impact on the productivity of the banking sector. Additionally, a secondary research will be carried out in order to review the information on the growing body of research concerning challenges faced by banks in emerging economies, and how the banks can remain productive despite the harsh economic reality.

The study will be best suited by a quantitative survey because the method is easy, fast and affordable. Moreover, the study intends to reach a number of participants in various branches of Libyan commercial banks at locations in all major towns. ii. Data Collection The study will use structured questionnaires to gather information from respondents and the questionnaires will be tailored in such a way that they provide answers to the research questions. The major themes that the research will address include the growing rates of interests and how they affect the performance of banks.

The study will also determine the motivational factors behind the increasing volume of credit demand. Another theme will be the kind of strategies that banks use to enhance productivity through control of interest rates and control of volume of credit deposit. The questions in the instrument will be kept as precise as possible and comprehensive enough to enable the respondents answer as easily as possible. iii. Sampling Participants will be selected randomly from across all branches of the six commercial banks in Libya.

The study group will consist of bank managers, bank employees and clients. The structured questionnaires will be tailored according to the category groups. The client segments will be composed of those who have borrowed from banks and charged interests on the financial products. iv. Data Analysis Data analysis will include methods that are approved for analyzing quantitative surveys. The completed questionnaires will be subjected to SPSS analysis and the statistical means, standard deviations, and sample sizes will be screened fro major discrepancies.

The study will also apply descriptive and factor analysis to test for the significance in any relations between interest rate and credit deposit volume measurement and productivity of commercial banks. v. Procedure Prior the commencement of the study ethical justification will be sort because the study deals with human subjects. The purpose and intention of the study will be explained and respondents will be allowed to participate only on informed consent. The questionnaires will be pilot tested for credibility then administered to respondents. Completed questionnaire will be presented for analysis.

Aim of Research To identify a strategy by which the Libyan commercial banks can increase productivity. List of References Amel, O. 2001. Political culture in Libya. London: Routledge. Creane, S. , Goyal, R. , Mobarak, M. , & Sab, R. 2003. “Financial development in the Middle East and North Africa (MENA),” IMF. Web. Accessed August 11, 2010, from http://www. imf. org/external/pubs/ft/med/2003/eng/creane/index. htm Fabozzi, F. , Mann, S. , & Choudhry, M. 2003. Measuring and controlling interest rate and credit risk, Volume 104, 2nd Edition. London: John Wiley and Sons.

Goldsbrough, D. 1996. Reinvigorating growth in developing countries: lessons from adjustment policies in eight economies. IMF. Gopalsamy, N. 2006. A guide to corporate governance. NY: New Age International International Monetary Fund (IMF). 2006. The socialist people’s Libyan Arab Jamahiriya: 2006 article IV. International Monetary Fund. Moorad, C. 2004. An introduction to credit derivatives. UK: Butterworth-Heinemann Porta, R. , Lopez-De-Silanes, F. , & Shleifer, A. n. d. Government ownership of banks. Accessed Web. http://citeseerx. ist. psu. edu/viewdoc/download? doi=10.

1. 1. 11. 6114&rep=rep1&type=pdf. August 11, 2010. Otman, W. , & Karlberg, E. 2007. The Libyan economy: Economic diversification and international repositioning. UK: Springer Rabin, J. , & Stevens, G. 2002. Handbook of monetary policy. NY: CRC Press Sanjay K. , Nawalkha, G. , & Natalia, B. 2005. Interest risk modeling. London: John Wiley and Sons. Scott, B. 2003. Talk your way out of a credit card debt! New York: Press One Pub Vandewalle, D. 2006. A history of modern Libya. London: Cambridge University Press Walsh, C. 2003. Monetary theory and practice. US: The MIT Press

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