Dissection of the Behavior of Interest Rates in a Developing Country’s Commercial Banking Sector

Topon Sen

MPRA Paper from University Library of Munich, Germany

Abstract: The comportment of interest rates within Bangladesh's commercial banking sector, particularly with regard to lending, has emerged as a matter of considerable concern. The modulation of these lending rates is swayed by an intricate web of determinants, such as statutory reserve requirements, policy rates dictated by the Bangladesh Bank, deposit interest rates, the Consumer Price Index (CPI), National Savings Certificate rates, banks' income-to-expenditure ratios, profitability metrics, liquidity and solvency conditions, as well as the overarching stance of both monetary and fiscal policies. Additionally, extraneous, non-economic forces exert their own influence. In this inquiry, an effort is undertaken to meticulously scrutinize the manifold factors shaping lending rate behavior through the application of the Ordinary Least Squares (OLS) methodology. The analysis reveals that CPI, excess reserves, deposit rates, and policy rates bear significant influence on the trajectory of interest rate behaviors within commercial banks. Contrary to popular conviction, which holds that Non-Performing Loans (NPLs) are the paramount factor compelling banks to impose elevated lending rates, our findings indicate that NPLs do not exhibit statistical significance in this context. In recent epochs, the growth of credit extended to the private sector has faltered beneath its anticipated pace, largely attributable to a circumspect approach adopted by investors amidst prevailing political turbulence. Given the persistence of high lending rates, it becomes imperative to initiate a systematic endeavor toward establishing a more judicious and sustainable interest rate framework, one that conscientiously aligns with the socio-economic fabric of the nation.

Keywords: Interest Rate; Bangladesh; Bank; Commercial Banks (search for similar items in EconPapers)
JEL-codes: E0 E3 E4 E6 (search for similar items in EconPapers)
Date: 2022
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