Factors Affecting Interest Rate Spread in the Banking Sector of Bangladesh
Tandra MondalDepartment of Finance and Banking, University of Barishal
Email: t.mondal44@gmail.com
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Abstract
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Purpose: This paper examines the macroeconomic factors and bank-specific
variables that affect the interest rate spread in the banking sector in Bangladesh
using a two-step generalized method of moment estimation technique.
Methodology: Using panel data from 2013 to 2022, the study examines 30
scheduled banks, including four state-owned and 26 private commercial banks. A
two-step Generalized Method of Moments (GMM) estimation technique is
employed to analyze the impact of GDP growth rate, inflation, capital adequacy
ratio, return on assets, bank size, and non-performing loan ratio on the interest
rate spread.
Findings: The results reveal that bank size, return on assets, non-performing loan
ratio, and GDP growth rate have a significant and positive effect on the interest
rate spread. In contrast, capital adequacy ratio and inflation exert a negative but
statistically insignificant influence. These findings provide valuable insights for
regulators and policymakers in maintaining an optimal interest rate spread to
support banking sector stability.
Originality/Value: While interest rate spread has been extensively studied, this
research contributes updated evidence using a recent decade of post-crisis data
(2013–2022). By integrating both macroeconomic and bank-specific variables
within a robust panel framework, the study offers a context-specific analysis that
captures the evolving financial and regulatory landscape of Bangladesh.
Practical Implication: This study provides direct guidance for banking sector
stakeholders. Bank managers should prioritize operational efficiency and
enhanced credit risk management to control spread-driving costs. Regulators can
implement targeted policies like differential capital requirements for banks with
high non-performing loans. For policymakers, maintaining sustainable economic
growth is confirmed as essential for banking sector stability.
Limitations: The findings are specific to Bangladeshi banks and may not
generalize to other regions.