The Impact of Interest Rate on Bank Deposit: Evidence from the Albanian Banking Sector (Jan 2005 – Dec 2014)

Abstract

This paper focuses on analyzing the Relationship between Interest Rates and the level of deposits in the Albanian banking sector. High interest rate should affect the bank customers to become more willing to deposit their funds there. While, low interest rate should discourage them. The paper consists in analyzing the effects of variables to identify the progress of the deposits in the period 2005- 2014. The data are sourced from the Central Bank of Albania and the Institute of Statistics. The model of study has as dependent variable level of deposits, while the explanatory variables are the deposit interest rate and Gross Domestic Product (GDP). Meanwhile, ordinary Least square (OLS) is used as the statistical method to analyze the data. The result of the paper indicates that interest rates have a significant impact in explaining the level of deposits over the years. In addition, interest rates on foreign currency deposits have a positive impact, assessing the level of growth in foreign currency deposits in the banking system during period 2005-2014. This study recommends that banks should be careful in attracting the depositors; banks should give them full information and educate on interest rates for depositing funds in banks.

DOI: 10.5901/ajis.2016.v5n2p257