The weighted average interest rate spread in Bangladesh鈥檚 banking sector surged to 5.86 in May, the highest since 2008.
The interest rate spread refers to the difference between the interest rates charged by banks on loans and the interest rates they pay against deposits.
According to Bangladesh Bank data, the spread increased to the current level from 5.04 per cent in February 2024 and 4.66 per cent in December 2023, and significantly up from 2.93 per cent in June 2023.
The spread in May was the highest after 2008 when it reached 5.96 per cent.
The spread increased due primarily to rising lending rates.
The higher interest rate spread indicates that banks are earning more on loans compared with what they pay against deposits.
Currently, banks are charging 5.86 per cent more on loans than they are paying on deposits.
The introduction of a 9-per cent lending rate cap on April 1, 2020 led to a sharp decline in the interest rate spread at that time.
However, the spread began to increase after the central bank removed the cap in July 2023.
On May 8, 2023, the Bangladesh Bank allowed lending rates to be determined by market forces.
Currently, some banks are charging close to 15 per cent for loans, while deposit rates have been increasing gradually, albeit more slowly than lending rates, contributing to the higher spread.
Experts said that banks might have raised lending rates in response to perceived higher credit risks or increased demand for loans, possibly due to economic uncertainty or inflationary pressures.
Bankers attributed the recent increase in lending and deposit rates to the central bank鈥檚 shift from a monetary targeting framework to an interest rate targeting framework to curb inflationary pressures.
In May, banks offered an average interest rate of 5.42 per cent for deposits and charged an average of 11.28 per cent for loans, resulting in a spread of 5.86 per cent, according to Bangladesh Bank data.
In comparison, in December 2023, banks offered an average deposit rate of 4.70 per cent and charged 9.36 per cent for loans, resulting in a spread of 4.66 per cent.
The Bangladesh Bank removed the limitation of keeping the spread below 4 per cent in November 2023 as the lending rate ceiling was scrapped.
To ensure sustainable business operations, banks must maintain a certain profit margin, experts said.
While lending rates have been raised, there has been no systematic increase in deposit rates, which has resulted in deposit rates remaining significantly below the country鈥檚 inflation rate, which has been above 9 per cent for the past year.
In June, the inflation rate was 9.7 per cent, while the deposit rate was 5.42 per cent.
