Determinants of Interest Rate Spread in the Banking Sector of Bangladesh: An Econometric Analysis

ABSTRACT: This study aims to present the discussion on the Interest Rate Spread (IRS) of the commercialbanks in Bangladesh perspective. In this study researcher tried to show the relationship between the lendinginterest rate and broad money, lending interest rate and inflation, lending interest rate and quasi money and,lending interest and increase official exchange rate, lending interest rate and personal remittance variables usingtime series data. Here researcher uses some proxy data of Bangladesh Bank based on the time series data from1976-2020 periods from world development indicator, various publications of Bangladesh Bank and othersources. The analyze the money supply and its effect on interest rate spread in Bangladesh and analyze theofficial exchange rate and trend on interest rate spreads. In this study three different tests are done (unit-roottest, co-integration test and granger causality test). Unit roots test has been used to confirm the stationary of thedata. Co-integration test is used to verify the existence of a long-run relationship between variables. Thefindings of this tests shows that all variables are co-integrated in order 2 because at most 2 trace values is greaterthan critical value and others are not. That means there is an evidence of long run co-integration among thesevariables. According to this test there is some unidirectional causality and bidirectional relationship betweenofficial exchange rate and personal remittance. Here shows the efficiency of the commercial banking sector andhence economic growth and development of Bangladesh.

KEYWORDS: Economic growth, Interest rate spread, Inflation, Quasi money, Unit-root test.