An Empirical Study on the Factors Affecting the Interest Rate Spread of Listed Conventional Commercial Banks of Bangladesh

Abstract

This paper aims to explore the factors affecting the interest rate spread of the listed conventional commercial banks of Bangladesh from 2011 to 2019. For this, banks' interest rate spread has been considered a dependent variable while bank-specific, industry-specific, and macroeconomic factors have been considered independent variables. Bank-specific factors are credit risk, bank size, operating cost, liquidity risk, net interest income, capital adequacy, return on equity. The bank industry-specific factor is market share, while macroeconomic factors are GDP and Inflation. Pooled Ordinary Linear Regression analysis and the random-effect method have been used to investigate the impact of the factors on interest rate spread. The results demonstrate that credit risk, operating costs, and liquidity risk positively impact interest rate spread. The asset size and GDP have both positive and negative relationships depending on the circumstances. In contrast, net interest income, capital adequacy, return on assets, and market share have a negative relationship. The study's findings will assist the regulatory body of the banks in developing strategies to maintain a satisfactory level of interest rate spread.

Determinants of Interest Rate Spread of Nepalese Commercial Banks

“…Finally, the positive influence of GDP shows that banks can increase their IRS when there is economic growth in the country. The positive influence of INF and GDP supports the findings of Claeys and Vander (2008); Sheriff and Amoako (2014); Damane (2020) and Anjom (2021). On the other hand, this finding is opposed with the findings of Ghasemi and Rostami (2015) and Tarus and Manyala (2018).…”

“…Similarly, the significant positive coefficient of CR indicates that it also has a positive influence on IRS which depicts that the bank with higher credit risk has higher IRS. The positive influence of CR corroborates the findings of Muhammad (2012) and Anjom (2021) and disagrees with the findings of Ghasemi and Rostami (2015). Likewise, the significant negative coefficient of ME and OE shows that they have a negative influence on IRS which reveals that the bank with sound management and operating activities can reduce their IRS.…”

“…On the other hand, macroeconomic factors are also found as the strongest factor for determining IRS (Afanasieff et al, 2002). Furthermore, macroeconomic variables, bank related factors and industry related factors are also found to be the strongest determinants of IRS (Khan & Khan, 2010;Hailu, 2016;Anjom, 2021).…”

Effects of Non-Performing Loans & COVID-19 Pandemic on the Performance of Commercial Banks in Sri Lanka

“…However, as banks are no longer able to generate adequate interest income through classical securities loans and need to maintain reserves in the form of provisions to cover final debt losses, bank capital is declining along with their health and the vulnerability of NPLs is increasing. Therefore, banks need to identify and understand the macroeconomic factors that contribute to the rise of rated credit in the banking system and take proactive action to deal with the phenomenon of a bad choice of borrowers (Anjom et al, 2016).…”

Capital Market Efficiency and Economic Growth: Evidence from Bangladesh

“…In cases where capital markets lack efficiency or financial stability, the public offering of stocks diminishes due to high transaction costs and uncertainties regarding obtaining a fair market price. This inefficiency and financial instability can diminish the motivation to initiate new ventures, ultimately reducing the overall long-term productivity of the economy (Anjom & Faruq, 2023). According to Ekundayo (2002), achieving sustainable economic growth and development necessitates substantial local and foreign investments, and the capital market serves as a conduit for making this possible.…”