INTEREST RATE DIFFERENTIALS ON FIXED DEPOSITS IN SINGAPORE BANKS

Abstract

Almost everyday we can see in newspapers, banks (both local and foreign) advertising the rates they are offering for both Singapore dollar and Asian Currency Units (ACUs) deposits. More often than not, the rates offered are different. But why are they different? This academic exercise deals mainly with the commercial bank market (in particular, Singapore dollar and ACU deposits) in Singapore. This paper attempts to answer certain pertinent questions; Is there an interest rate differential on fixed deposits of the same currency in Singapore banks? And if so, why? From a humble beginning in the mid-nineteenth century, Singapore is now an internationally recognized financial centre. Thus we begin, in Chapter II, by dis­ cussing some elements of banking and how foreign and local banks operate in Singapore. In the course of data collection, more than 10 local and foreign banks were approached for data and interviewed. Statutory boards like the Monetary Authority of Singapore (MAS) and Association of Banks in Singapore (ABS) were also approached for information. But before being able to fully understand the significance of the data, we need a framework in which to put these data in perspective. This was the objective of Chapter III. Besides this, the concept, importance and tests of Financial Integration was expounded. In 1985, Singapore experienced a recession, experiencing a real GNP growth of -1.8 per cent. Caused in part by high savings and high wages, swift government policies and actions brought the economy back on the road to recovery by the end of 1986. The period of 1985 to 1988 was one which showed Singapore both at her ebb and peak. It was on this basis and the availability of data, that the data analysis was done in Chapter IV. The analysis covered Singapore dollar deposits of short, medium and long term maturity, and major ACU deposits. Finally, in Chapter V, a summary of all the analysis and conclusions is discussed and policy recommendations made. This paper successfully addresses the topic and the explanation and tests does show the existence of an interest rate differential on fixed deposits of the same currency in Singapore banks, in particular, foreign banks generally offer higher deposit rates than local banks in Singapore.