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Mustafa Kamal: No compound interest rate from next fiscal year

  • Published at 09:11 pm March 18th, 2019
Finance Minister AHM Mustafa Kamal
Finance Minister AHM Mustafa Kamal addresses top banking officials during a meeting held at the national economic council (NEC) auditorium of the Planning Commission on Monday Courtesy

Coming down heavily on the banking sector, the finance minister also said aspirant bank directors have to face interviews to become directors

Compound interest rates will no longer be exercised in the banking sector from the next fiscal year, said Finance Minister AHM Mustafa Kamal on Monday.

Coming down heavily on the banking sector, the finance minister said aspirant bank directors have to face interviews to become directors, as most don’t have adequate knowledge of banking and the economy.

“Compound interest rates are nowhere in the world. Simple interest rates prevail in the rest of the world. So compound interest rates will be gone from next fiscal year,” Kamal said at a discussion with top officials of the central bank, state-owned commercial banks, and state-owned specialized banks and financial institutions.

“Specific instructions to effect simple interest rates will be given in the next budget.”

Banks’ chairmen, directors, and managing directors attended the meeting held at the national economic council (NEC) auditorium of the Planning Commission.

The finance minister said there have been some weaknesses in our country’s banking sector for a long time. Now we should put our hand to fixing the banking sector.

“There is no insolvency act in our country. We have no asset management company. We will make these happen. The bond market will be developed, “Mustafa Kamal told reporters after the meeting.

The finance minister said the general public is fast losing their confidence in banks. “Banks are not in the place where they used to be in the past in terms of trust. We will bring the trust back.”  

He said action will be taken against errant bankers and borrowers only after conducting special audits of banks. Board members with no knowledge of the banking sector will be removed. Bank directors will have to have subject specific knowledge. They will have to face interviews to be appointed to the post.

The government will show zero tolerance against corruption, he said, adding that the banking sector will soon see reforms.

Bangladesh Bank governor Fazle Kabir, Private Industry and Investment Advisor to Prime Minister, Salman F Rahman,  Bangladesh Association of Banks (BAB) chairman Nazrul Islam Mazumder, Association of Bankers of Bangladesh (ABB) chairman Syed Mahbubur Rahman, were present at the meeting, among others.

What is Compound Interest?

According to Investopedia, Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. 

The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, the greater the compound interest. Thus, the amount of compound interest accrued on $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period. Since the interest-on-interest effect can generate increasingly positive returns based on the initial principal amount, it has sometimes been referred to as the "miracle of compound interest."

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