KARACHI, Feb 7: Banking spread, which shows a gap between lending and deposit rates, declined by 30 basis points in December 2007 compared to December 2006.

Higher banking spread means that banks are keeping more profits and returning less to depositors.

The above seven per cent banking spread is still too high as depositors are getting almost negative return in the wake of above eight per cent inflation.

Banking sector spread in December fell to 7.14 per cent against 7.44 per cent during the same period last month.

Banks have been under serious criticism regarding higher spread as it deprives depositors of their right to earn more on their deposits.

The governor of State Bank of Pakistan had also assured some corrective measures to improve the situation, but failed to take any action against the booming banking industry.

While the banks made record profits during the last four years, depositors received negative returns.

Head of banks have reportedly been asked to clarify their position before the Competition Commission regarding the high banking spread as the commission doubts that the banks have made a cartel to exploit the situation.

The Competition Commission has set Feb 12 as the date for their appearance.

The weighted average full year lending rate also dropped by 10 basis points to 7.29 per cent.

Banking analysts said the drop was due to State Bank’s monetary policy which provided incentive to banks.

The SBP in its last monetary policy for July-December 2007, declared zero rating of Cash Reserve Requirement (CRR) for all deposits of one-year and above maturity (to encourage greater resource mobilisation of longer tenor) and seven per cent CRR (Cash Reserve Requirement) for other demand and time liabilities.

This incentive encouraged banks to mobilise deposits for longer tenures which offer better returns.

The State Bank of Pakistan recently reported that the banks succeeded in mobilising Rs72 billion as deposits for above one year tenure in the last six months. During the same period, deposits for less than one year tenure increased by just Rs32 billion.

“This higher tenure deposits increased return to depositors which reflects from the slight decline in the banking spread,” said Mohammad Imran, head of research at First Capital Equities.

He also pointed out that Islamic banks were giving higher returns and have succeeded in attracting more deposits, and it has also started affecting the banking spread.

The Islamic banking is still in its initial stages and the size is less than five per cent. It is getting popularity among the religious groups.

This element is yielding good results in favour of Islamic banks and they are fast spreading their branch network across the country.

“Despite this slight improvement in the banking spread, the spread is still higher in the region,” said another analyst.