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An Empirical Investigation on the Determinants of Interest Rate Spread of Commercial Banks in Bangladesh

Author

Listed:
  • Akash Hossain

    (University of Dhaka, Bangladesh)

  • Raad Mozib Lalon

    (University of Dhaka, Bangladesh)

Abstract

This paper aims to investigate the determinants or factors affecting the interest rate spread of private commercial banks in Bangladesh from 2013 to 2022. For the purpose of the study, the interest rate spread (IRS) of banks has been considered as a dependent variable while bank-specific factors and macroeconomic factors have been considered independent variables. Bank-specific factors are credit risk, bank size, operating cost ratio, liquidity risk, net interest income as a ratio of total income, capital adequacy ratio, and loan to deposit ratio while macroeconomic factors are Inflation and GDP. The Pooled Ordinary Least Square method (OLS), the Fixed Effect method (FE), the Random Effect method (RE), and the Generalized Least Square method (GLS) have been used to investigate the impact of the factors on interest rate spread. The results exhibit that bank-specific factors such as net interest income as a ratio of total income, and capital adequacy ratio are found to be statistically significant and positively impact the interest rate spread. In contrast, the results also exhibit that bank-specific factors such as bank size, operating expense ratio, and loan to deposit ratio are statistically significant and negatively impact the interest rate spread. Again, the results determine that the macroeconomic factor which is inflation found to be statistically significant and positively impacts the interest rate spread. The study’s findings will assist the banks’ regulatory body in formulating and developing strategies to maintain a satisfactory level of interest rate spread.

Suggested Citation

  • Akash Hossain & Raad Mozib Lalon, 2024. "An Empirical Investigation on the Determinants of Interest Rate Spread of Commercial Banks in Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 14(6), pages 97-103, October.
    • Handle: RePEc:eco:journ1:2024-06-10
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    References listed on IDEAS

    as
    1. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," The World Bank Economic Review, World Bank, vol. 13(2), pages 379-408, May.
    2. Arezoo GHASEMI, & Malihe ROSTAMI, 2016. "Determinants Of Interest Rate Spread In Banking Industry," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 5(1), pages 1-46, January.
    3. Mr. Joe Crowley, 2007. "Interest Rate Spreads in English-Speaking African Countries," IMF Working Papers 2007/101, International Monetary Fund.
    4. Fadzlan Sufian & Muzafar Shah Habibullah, 2009. "Determinants of bank profitability in a developing economy: Empirical evidence from Bangladesh," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 10(3), pages 207-217, April.
    5. Faris Nasif Al Shubiri & Syed Ahsan Jamil, 2017. "Assessing the Determinants of Interest Rate Spread of Commercial Banks in Oman: An Empirical Investigation," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 90-108.
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    More about this item

    Keywords

    Interest Rate Spread; Credit Risk; Bank Size; Liquidity Risk;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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