Introduction
Bank Muscat was established in 1982 and overall 3300 employees. It is one of the largest banks in Oman. All over the country, it has 138 branches and more than 431 ATMs. Muscat bank also reaches the international markets like it has branches in Saudi Arabia, UAE, Kuwait, and Singapore. They provide services on an individual level for the business and for the corporation as well as equally. The most common services of the bank Muscat are like other banks of Oman, wholesale banking in which they provide all the services as like other banks. Investment banking, private banking, treasury services, and global markets are the most common services they provided. Like others, the financial products they offers are day-to-day account, deposit account, loans, mortgages, and card services (Khamis, et al., 2010).
It is significant to study the impact of interest rate fluctuations on the profitability of Bank Muscat for the effective formulation of policies. The application of interest rates depends upon the economic system in which the leading occurs. The interest rate depends upon interest income, noninterest income, minus interest expense, and profits. By adding that things the interest rate can be very (Prasad & Bologna, 2010). This is the reason the economy observes the change in the rate of interest. This change is assumed to be affecting the profitability that the bank assumes to encounters. As we know greater the interest rate greater the profitability of the bank. The greater interest rate makes the profit of banks increase as follows. The interest rate is directly proportional to the profit of the bank (Prasad & Bologna, 2010).
Rationale
After the review of the studies, Muscat bank faces an adjustment cost when changing their interest rates or when they explain the smoothing interest rates on their services (Epstein, 2005). It’s essential because of the daily ups and downs of the value of the international currency and things. Now it is clear why can change Muscat bank their interest rate. As compared to the profits, shares, sales, and interest income after that interest rate will be automatically coming out. The greater the interest rates make the payment on credit cards expensive which can also be observed on loans. Customers which are already dealing with banks in terms of their loans or eventually have to pay any sort of interest will experience a fall in disposable income because major of their payments will be utilized in interest payments. The very interest rates have a significant impact on customer spending (Epstein, 2005). For instance, if the interest rate varies from 0.5 percent then it also can increase or decrease the loan of 100000 by 60 per month which is not a minor difference.
Research Questions
Q1: Is it essential to change the rate of interest of Bank Muscat?
Q2: Could it be profitable for the organization if the Muscat bank changes the rate of interest?
Q3: Are there any external elements that can affect the rate at which interest is accrued?
Q4: How do lower and higher interest rates affect Bank Muscat? Explain?
The objective of the study
- To study the effect of high and low-interest rates on Bank Muscat.
- To find the profit and loss in the terms of increasing and decreasing the interest rates in Muscat bank(Nabli & Nugent, 2017).
- To observe the conditions of the economy of the country in which it is necessary to change the interest rates (Keynes, 2016).
The scope of the study
As we know the change in interest rate is really an important thing which ups and downs the conditions of the economics of a country. Here the actual discussion is about that is the change of the rates of interest really can affect the Muscat bank. The advantage of the change in the rate of interest is that the bank will have high profitability and the disadvantage is that the bank will experience a decline in profits (Keynes, 2016).
Literature Review
The classical theory of interest rate refers that the demand and supply of money that determine the rate of interest. For the economic development of a country is based highly on its commercial banking system. A structured banking system fosters healthy conditions for businesses and investment and controls poverty. The banking sector of Oman is highly concentrated, and three local banks hold the maximum share of total assets (Al-Muharram, 2015). There is a general opinion in public that the banking system holds a monopoly, and interest rates of banks should be lowered. Bank Muscat is a top bank in Oman with total assets of 28.1 billion US dollars in the year 2016. It employs 3024 people, and the net income of this bank is 459 million US dollars. For businesses and their growth; the interest rate is significant because of the fact that it relates to the increase and decrease of not only banking capital but it has a direct influence on the profit margin ratios.
The loanable fund theory of interest rate refers that time plays an important role in the determination of the interest rate on the loanable funds. This neo-classical theory of interest emphasizes that the demand for savings and the supply of loans in the credit market influence the rate of interest. The increase in interest rates will not always be negative as it can produce some benefits, especially to those who have savings in their banking accounts on which banks later trade and pay them profits which are considered as interest earned. The increase in interest rates will eventually have a positive or direct or proportional relationship with the government interest payments because, with a change in one, the change in the other can be observed. Now the problem is that in the Muscat bank Oman the interest rates change can be profitable for the organization. It is essential to change the interest rates. Here the problem occurs that is it necessary to change the interest rate if there is no profit for the organization. The change of interest rates is not easy for the organization (Epstein, 2005).
This is the main issue which we have to find the correct answers for the Muscat bank. The researchers of Muscat banks also want to know about that solution because it is essential information about Muscat which helps this organization to survive (Brigo & Mercurio, 2016). The interest rate is normally seen as an annual percentage of the principle involved. If the government saw the signs of inflation, deflation, stagnation, and other of that type of issues then the government raises or lowers the interest rates in the reaction to these conditions (Brigo & Mercurio, 2016).
The business involves in such trading with Muscat bank should be looking for additional benefits. Therefore, the bank has to make certain offers and products to the customers so that they would be able to ignore the monetary difference. The general trading rules always involve such offers and they always remain the concerned focus of the customers.
Interest Rate
The productivity theory of interest rate refers that a specific amount of money is paid or received on the use of certain money, and interest rate defines the percent of the principal amount to be paid on the usage of money (Cambridge Dictionary, 2018). Banks set their own interest rate for borrowers and depositors. Banks motivate depositors by offering an appealing interest rate on deposited money. In practical situations, banks set the high-interest rate on personal loans and offer a low-interest rates on deposited money. This difference in interest rates creates a channel of profitability for banks. The abstinence theory of interest rate refers that interest received on the principal amount is the reward for refraining from the consumption of the money. The Austrian theory of interest rate refers that the present goods have more associated value than the goods of the future. The amount of interest motivates people to invest in future requirements. The compensation was given in the form of interest to increase the satisfaction of the consumer.
The increasing competition in the banking sector is crucial in defining the interest rate of commercial banks. It is a contested idea that there is no observed relationship between interest rate and profitability as weather dependent as well as independent variables for the banks. Risk managers conclude that interest rate is influenced by many other factors. Some statisticians believe that a change in interest rate also hurts profitability when the bank has to pay interest on customer deposits. It elaborates the reality that increases in interest rate is not always profitable for banks. It depends on a variety of variables whether the increase or decrease in interest rate is profitable for the bank or not. Bank profitability has interior and exterior determinants. Interior determinants are bank-specific and depend on the policies of banks while exterior determinants are not in the control of banks (Firth, et al., 2016). The category of interest rate is defined by the policies of a country or region. Researchers of Morgan Stanley conclude that banks having big books of variable rate loans stand in the best position to benefit from the official rise of the interest rate as they hold the flexibility to increase their interest rate swiftly.
Conditions of the banking sector in Oman
The interest rate in Oman has been deregulated to increase the competitiveness of the financial sector, to enhance and developed maturity in resource allocation in the factor which is considered better price discovery. This concept is vital to strengthening mechanisms involved in the transmission of monetary policy especially (Al-Muharram, 2015). The deregulation of the interest rates in Oman started in 1993, firstly on the deposit fund and secondly on lending loans with the exception of the personal loan category. On personal loan trading which is a common phenomenon in Muscat bank, there always remain constant revisions on the interest rate after each interval which is usually done by overviewing. This is also done in order to accommodate the borrowers and provide suitability to their interests. This is because excessive demands for personal loans can instigate banks to increase their interest rates. This deregulation of interest rates has developed better financial conditions and strengthened mechanism which is already being discussed in terms of monetary policy. Interest rates determined by the market have elevated competition in the market (Borio, et al., 2017). With the rate which is being awarded as interest on personal loans, the interest rate of Oman is usually aligned with interest rates subsequently and ultimately prevailing in the United States of America.
Impact on profit margin
Omani banks have high net interest margins as compared to other countries in Gulf Cooperation Council GCC (Al-muharrami, 2016). This is a good measure to determine the profitability of a bank or financial institution. The regression in net interest margins depicts reduced investment and economic growth. Bank Muscat sustains good net interest margins over the years owing to the stable interest rate.
Variables
Economic conditions and market competition are independent variables, the interest rate is mediating variable and profitability is the dependent variable. Economic conditions are one of the key factors which are involved in the current situation being presented for the profitability impact due to interest rate. Interest rate changes in two manners; either it increases or decreases. An increase in interest rate is favorable for people keeping their deposits with banks and earning more interest on deposited money. But it also makes borrowing expensive. Banks manage this situation by maintaining such interest rates which provide them with maximum profit (Esposito, et al., 2015). An increase in the interest rate of Bank Muscat can improve profitability as Oman has good economic conditions. A dip in interest rate can invoke people to withdraw their deposited money, and borrowing can become less expensive. Bank Muscat manages its interest rate by monitoring economic trends, and market situation to increase its profitability.
Research Methodology
The researcher has chosen a qualitative method to conduct this research as it is about exploring the impacts of the interest rate on the profitability of Bank Muscat. Annual reports of Bank Muscat and Central Bank of Oman would be analyzed for this purpose. A detailed analysis of the net interest income of Bank Muscat in the past few years would be conducted to get a deep insight into the relationship between interest rate and the profitability of banks. Secondary information can also be used by using previous research from authentic scholars. Their work can help in developing and understanding the relationship between interest rates and the profitability of banks. Interviews would be conducted with distinguished economists, the chief executive officer of Petroleum Development Oman, and policymakers of Bank Muscat. Their opinions and experiences would be analyzed comprehensively to approach an effective conclusion. A questionnaire would be designed to evaluate the impacts of an interest rate change on the profitability of Bank Muscat. This questionnaire would receive information from students, scholars, and professionals from the Sultan Qaboos University of Muscat. Information from questionnaires can add useful and effective material to data researchers.
Population and sampling
The size of the sample for this study is 50 which includes students, scholars, and professionals from Sultan Qaboos University of Muscat, the chief executive officer of Petroleum Development Oman, and policymakers of bank Muscat.
Data analysis
A qualitative analysis of data would be performed. The financial statements of the past five years of Bank Muscat would be compared. DTM data comparer would be used for this purpose.
Budget
| Description | Amount (Omani Rial) |
| Funds for arranging meetings | 100 |
| Transportation | 200 |
| Printing of questionnaire | 10 |
| Stationary | 5 |
Limitations
The data obtained through annual reports of Bank Muscat may not depict the true picture of the financial conditions of the bank that can impact the accuracy of this research. Many factors that can impact the profitability of bank Muscat with the change in interest rate may not be accounted for in this research that can influence the results of the study. Moreover, the size of the sample is small for the purpose of data collection which can limit the scope of this study.
Time Plan
The time span plan for the research study is given below
| Plan | Time | |
| 1 | Topic Selection | 1 week |
| 2 | Research Proposal | 1 week |
| 3 | Literature Review | 2 weeks |
| 4 | Collection of reports from authentic resources | 1 week |
| 5 | Conduction of interviews | 1 week |
| 6 | Interpretation of information from the questionnaire | 1 week |
| 7 | The arrangement of information from the interview | Half week |
| 8 | Compilation of information from all designated sources | 1 week |
| 9 | Detailed analysis of information | 1 week |
| 10 | Approaching a conclusion | 1 week |
| 11 | Review | 1 week |
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