Instead of capping the lending rate, the government should focus more on resolving issues that push up the interest rate, otherwise it will adversely impact the economy hindering investment by squeezing fund flow, experts have said.
On February 23, Bangladesh Bank asked scheduled banks to charge highest 9% interest for all types of lending, barring credit cards, to help expand business and economy.
“In Bangladesh, the problem is high interest rate. This is because of inflation and business risk alone with the soaring default loans. Putting cap on lending rate will not be a solution to this end,” former World Bank lead economist in Dhaka office Zahid Hussain told Dhaka Tribune.
"The solution steps should be those which will address these two issues. For this, Bangladesh needs structural reforms in banking sector, which will curb the soaring default loans also," said Zahid.
Besides, it should concentrate on business risk management for assessing the risk properly and for this regulation should be improved, the economist suggested.
Steps should also be taken against corruption in getting loans and government services, which increased the cost of doing business as well as the interest, he added.
Business leaders, however, have welcomed capping the interest rate at 9% as they think it will reduce cost of doing business and increase fund flow for investment, paving way for employment generation.
“This is a relief given by finance ministry and Bangladesh Bank to entrepreneurs. We have long been advocating lessening cost of doing businesses. We welcome the move,” the Federation of Bangladesh Chamber of Commerce and Industry (FBCCI) President Sheikh Fazle Fahim said.
“It is one element of ease of doing business, which will help our economy to grow through new investment and expansion,” he said.
Countering him, economists think that capping lending rate will adversely impact investment and economy.
“The 9% rate will only bring benefits for those, who will be able to avail loans at the given rate, while others will not reap any benefits from the cap on lending rate,” said Zahid Hussain.
He argued that business people who were weaker and less connected with banks would not avail loans while these people would get loan at previous higher rate.
“Complying with the Bangladesh Bank directives, if the banks lend money at 9%, they have to offer at best 6% on deposit rate, which is very near the inflation rate. As a result, depositors or the savers will not get any benefits and it will discourage them,” former finance advisor to a caretaker government AB Mirza Azizul Islam told Dhaka Tribune.
"People will either move towards consumption or make investment in gold or land, which will create dearth of funds in the banking channel hindering the lending," he pointed out.
"In this context, the banks will not be able to offer credit to investors, which will hit the investment hard as most of our investment comes from banking sector. Finally, the economy will see negative impact in terms of employment generation and poverty reduction," he elaborated.
Mirza Aziz suggested that the government should not take anticipatory decision on lending rate and take lesson from Kenya, which ultimately backtracked on its decision of capping rates.
Bankers also have claimed that implementation of 9% lending rate will be difficult as it will be more challenging to collect deposits at lower rate.
“Forceful implementation of the single-digit rate might create haphazard situation in the banking sector,” Nurul Amin, former chairman of Association of Bankers, Bangladesh (ABB), told Dhaka Tribune.
The experience of Kenya, a country in East Africa, was not good in the case of imposing a cap on interest rates on lending, said Nurul Amin, also a former managing director of Meghna Bank.
Talking to Dhaka Tribune, Anis A Khan, former managing director of Mutual Trust Bank, said: “Forced implementation of single-digit rate will impact banks’ profitability. If banks’ profitability decreases, the government will get lower tax from the banking sector.”
He said that lending rate should be single-digit but it should not be imposed.
“High bank borrowing of the government creates liquidity crunch in the banking sector, which impacts the interest rate on lending,” said Anis A Khan, former chairman of ABB.
“It is not implementable. Banks will not invest much, as they will be unable to implement the 9% lending rate after collecting deposits at higher rates,” Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
