Drivers of intermediation costs, financial repression and stability

Attempt to reduce interest rate artificially by setting a ceiling often restricts banks to pass on the intermediation costs to the borrowers which negatively affects bank lending, profitability and consequently, financial stability. In this context, the accounting decomposition of the net interest margin (NIM) for Bangladesh reveals that domestic banks’ after-tax profit margins range from negative to moderately positive, whereas, foreign banks retain substantially high profit margins. The higher costs of domestic banks are driven by their business model and stock of non-performing loans in their balance sheets. With net operating expenses and provisioning costs being the two biggest components of NIM, automation and structural reform can reduce intermediation costs, rather than repressive policy (e.g.ceiling) with potential unintended consequences.