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Assignment Question:

Industrial growth in any country is not possible until and unless the credit is made available to the
general public. To ensure the expansion of loans in the economy, a policy of reduction in interest rate
plays a pivotal role. Moreover, State Bank of Pakistan (SBP) has directed all the commercial banks to
extend the loan size to small and medium sized businesses, which is very important for the economic
development. In the recent years, State bank of Pakistan has lower down the interest rate for the banks.
In addition to that, overall oil price in international market declined which also caused the inflation to
be controlled by the Government of Pakistan at below 1.7%. Due to this downward trend in oil prices
and inflation rate, the current account deficit and interest rate of banks have also been reduced in recent
couple of years. For example, the interest rate was touching the highest point in October, 1996 (19.5%)
and today record lowest point of interest rate is observed in the Pakistan as in October, 2015 SBP
further reduced the interest rate by 50 bp (basis points) and now the current rate is at 6 % to serve two
basic objectives i.e. as a measure of financial inclusion and to achieve the overall economic growth of
the country as well.
This decrease in the interest rates will motivate people to invest more in business activities. More
business means more constructive activities and more opportunities will be produced for the growth and
development of SMEs. The whole process will ultimately lead towards a strong economy. Despite of all
these efforts, commercial banks have not cut down the interest rate for banking customers especially on
consumer loans (whereas, loans to corporate sector has been adjusted accordingly). As a result of this,
the banking spread has been increased over a period of time without making impact on the policy to
increase the customer base of banks. The ultimate burden of banking spread plunge on customers
instead of lowering it down by banks.


On the basis of above information you are required to answer the following questions:

1. It is believed by the analysts that low interest rates will increase the spending of the
banking customers. Do you agree with this statement? Support your answer with logical
2. In the above mentioned scenario, you are required to discuss that why there is
sustainability in the interest rate provided to the customers on consumer loans
irrespective of the lower interest rate policies announced by the state bank of Pakistan.

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low interest rate will give a rise to consumer spending.  

A: Yes, theoretically speaking a low interest rate regime will boost consumer the stage is set for a consumption-driven economy, which will benefit the bank’s consumer finance books. Having said that, banks should remain cognizant of the target market which they are servicing to ensure the development of a sustainable balance sheet and consumer finance business

Lower Interest rates encourage additional investment spending, which gives the economy a boost in times of slow economic growth. The Federal Reserve Board is in charge of setting interest rates for the United States through the use of monetary policy. The Fed adjusts interest rates to affect demand for goods and services. Interest rate fluctuations can have a large effect on the stock market, inflation and the economy as a whole. Lowering interest rates is the Fed's most powerful tool to increase investment spending in the U.S. and to attempt to steer the country clear of recessions.

asif bhai plz 2nd question ka ans b upload kr dain..

 Q.2. In the above mentioned scenario, you are required to discuss that why there is
sustainability in the interest rate provided to the customers on consumer loans
irrespective of the lower interest rate policies announced by the state bank of Pakistan.



According to the State Bank Of Pakistan Once the Fed makes a change to this discount rate, economic pastime either raises or decreases according to the intended results of the modify. W perhaps pass its power to reduce this discount rate that allows you to make borrowing cheaper for hen the nation's economy is usually stagnant or even slow, the Government Reserve may p associate banks.

When banking companies can be lent funds from the Fed at a less expensive rate, they could pass savings to banking clients through lower mortgage rates charged upon personal, auto or mortgages. This produces a financial environment that encourages customer borrowing as well as ultimately leads to an improve in customer spending back then in which in turn rates are low.

Although a reduction in the discounted rate really affects mortgage rates for consumers wanting to borrow by banks, consumer’s knowledge a decrease to mortgage rates on benefits vehicles as well. This may perhaps discourage long-term benefits in secure investment options like money market place savings records


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