An Analysis of Interest Rate Spread in the Banking Sector in Bangladesh

Abstract

This paper uses a bank profit maximisation model based on empirical industrial organisation approach to explain the interest rate spread (IRS) in the banking sector of Bangladesh using panel data of 48 banks covering the period of 2004 to 2008. The analysis shows that the higher the non-interest income as a ratio of total assets of a bank, the lower its spread. Similarly, market share of deposits of a bank, statutory reserve requirements, and NSD certificate interest rates affect the IRS. The analysis in terms of bank groups shows that IRS is significantly influenced by operating costs and classified loans for state owned commercial banks (SCBs) and specialised banks (SBs); while inflation, operating costs, market share of deposits, statutory reserve requirements, and taxes are important for the private commercial banks (PCBs). On the other hand, non-interest income, inflation, market share, and taxes matter for the foreign commercial banks (FCBs). The analysis brings out several systemic actions and measures at the bank level to improve earnings and profitability of the banks which are sustainable tools of reducing the IRS.

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