Bangladesh Bank caps lending rates on industrial loans at 9 percent

The Bangladesh Bank has finally set a ceiling of 9 percent on interest rates on industrial loans following the government promise to slash the rates to single digit ones.

The new rates will be effective from Jan 1, according to the decisions taken by the central bank’s board of directors on Tuesday, its spokesman Serajul Islam told bdnews24.com.

It would issue a circular instructing the banks on the new rates within a day or two, he added.

Currently, the banks offer loans to manufacturing sector entrepreneurs with interests between 11 and 14 percent.

The business community has long called for interest rates on lending and deposit to be fixed at 9 percent and 6 percent respectively.

Prime Minister Sheikh Hasina, too, has called on banks to slash lending rates on many occasions to little avail though the banks were receiving different facilities to cut the rates.

After a committee tasked with formulating a strategy to reduce lending rates submitted its report, Finance Minister AHM Mustafa Kamal said on Dec 18 that the central bank would soon issue a circular on the rates.

The central bank directors, in the meeting chaired by Governor Fazler Kabir, finalised the decision to cap the rates in line with the committee’s report, Serajul said.

Ahsan H Mansur

Economists think capping interest rates on bank loans is an unprecedented move in an open market economy.

“I don’t think forcing a decision will help cut the interest rates. The government banks will cut the rates but I don’t think the private banks will be able to do it,” Ahsan H Mansur, executive director of Policy Research Institute, told bdnews24.com.

“Because the operation cost of the private banks is much higher. They have to spend much on modern information technology to stay in the competition. Their earnings will drop sharply if they charge fewer interests,” he said.

He also argued that interest rates should be set by the market while everything in an open market economy like Bangladesh depends on how the market behaves.

“In that case, if a bank wants to offer loans at even 7 to 8 percent interests, they can do it as well.

“I don’t favour capping the rates,” added Mansur, who is also chairman of BRAC Bank.

Sheikh Fazle Fahim

Syed Mahbubur Rahman

Sheikh Fazle Fahim, president of the FBCCI, welcomed the central bank decision. “We have long been asking for this,” he said.

“I hope the banks will implement it and there will be strong monitoring by the central bank,” he added.

Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh or ABB, claimed every bank would lose Tk 1.5 billion in annual earnings if they charge 9 percent interest.

“It will ear into their profits. The government’s revenue collection and the stock market will also be badly affected,” the managing director of Mutual Trust Bank said.