The weighted average interest rate spread in Bangladesh’s 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% in February 2024 and 4.66% in December 2023, and significantly up from 2.93% in June 2023.
The spread in May was the highest after 2008 when it reached 5.96%.
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% more on loans than they are paying on deposits.
The introduction of a 9% 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% for loans, while deposit rates have been increasing gradually, albeit more slowly than lending rates, contributing to the higher spread.
Bankers attributed the recent increase in lending and deposit rates to the central bank’s 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% for deposits and charged an average of 11.28% for loans, resulting in a spread of 5.86%, according to Bangladesh Bank data.
In comparison, in December 2023, banks offered an average deposit rate of 4.70% and charged 9.36% for loans, resulting in a spread of 4.66%.
The Bangladesh Bank removed the limitation of keeping the spread below 4% in November 2023 as the lending rate ceiling was scrapped.
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’s inflation rate, which has been above 9% for the past year.
