The Effect of Real Rates, Inflation, and the Risk Premium on Time Deposit Rates in Pakistan

The purpose of the study is to examine the Time deposit rate of Conventional and Islamic banks over the period of 2016 to 2020 the data consist of annual deposit rate and time deposit rate on the Financial Performance of the Banking Industry in Pakistan. The econometric and panel regression model was used to evaluate the dataset of 18 banks from 2016 to 2020. Both conventional and Islamic bank rates show the presence of two cointegration vectors in deposit rates, real rates, inflation, and risk premium. Deposit rates are caused by inflation and risk premiums in a one-way causal relationship, according to causality tests. The variance decomposition results emphasize the importance of inflation and risk premium in explaining variations in bank deposit rates. The risk premium is the major determinant that has the most influence in Islamic banks. When comparing the two bank rates, Islamic bank rates receive more influence from explanatory variables in the long run than conventional bank rates. For both banks, real rates have no discernible effect on the variance of time deposit rates. Inflation shocks are the most important factor in explaining deposit rate movements for traditional banks