An Economic Analysis of Interest Rate Spread in the Commercial Bank of Bangladesh

This study aims to present the discussion on the Interest Rate Spread (IRS) of the commercial banks in Bangladesh perspective. This paper also explains the interest rate spread in the commercial bank ’ s of Bangladesh using time series data of 60 banks covering the period of 1976 to 2020. The analysis shows that the higher the non-interest income as a ratio of total assets of a bank, the lower its spread. In this study, I tried to show the relationship among the lending interest rate with broad money, inflation, quasi money, official exchange rate, and personal remittance. Variables are using time series data. Here I used some proxy data of Bangladesh Bank based on the time series data from 1976-2020 periods from world development indicator and also collected data from various publications of Bangladesh Bank and other relative sources. In this paper, I used different statistical tools such as bar graph, pie chart, line bar, column, area, etc. The analyze the money supply and its effect on interest rate spread in Bangladesh and analyze the official exchange rate and trend on interest rate spread. Here shows the efficiency of the commercial banking sector and hence economic growth and development of Bangladesh.

schedule banks weighted average deposits was 4.01 and advances 7.15 and the IRS was (7.15-4.01) = 3.14.
In September of 2020 where the schedule banks weighted average deposits was 4.79 and advances 7.79 and the IRS was (7.79 -4.79) = 3. For any business that lends money, the interest rate spread is what the company charges on a loan compared to its cost of money. A bank runs on interest rate spreads, paying a certain rate on savings and CD deposits and making loans at higher rates than it pays to savers. Publicly traded financial companies such as banks often report the net interest rate spread earned on quarterly and annual financial reports. The World Bank supplies interest rate spread data from countries around the world showing the difference between the average lending rate and deposit rate. Interest rate spread (lending rat minus deposit rate; %). Interest rate spread is the interest rate charged by banks on loans to prime customers minus the interest rate paid by commercial or similar banks for Demand, Time, or Savings deposits. This page has the latest recorded value, an historical data chart and related indicators for interest rate spread.
In banking, the net interest rate spread is the difference between interest earned on loans, securities, and other interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. Intuitively, net interest rate spread is similar to profit margin. In general, the larger a bank's interest rate spread, the more it earns and the more it is therefore worth. When interest rates change, however, the interest a bank receives on its assets and pays on its liabilities fluctuates and can decrease income. Thus, it is important to monitor changes in net interest rate spreads as well as the size of those spreads. Interest rate spreads define, apart from reference interest rates, the markups and markdowns that can be stored in the system independent of the yield curve. They can be positive or negative. Interest spreads are managed in the system as follows: Create the required interest rate spread types in customizing. This enables interest rate spreads to be entered in the system automatically in the same way as it is entered manually for every combination of refer-ence interest rate and interest rate spread type. The money supply and its effect on interest rate spread in Bangladesh and analyze the official exchange rate and trend on interest rate spreads. Here shows the efficiency of the commercial banking sector and hence economic growth and development of Bangladesh. The analysis brings out several systemic actions and measures at the bank level to improve earnings and profitability of the banks which are sustainable tools of reducing the IRS.

Objective of the Study
The overall objective of this study is to analyze the level and trends in interest rates spreads and to document the key macroeconomic and market determinants of interest rate spreads in Bangladesh over the 1976-2020 period. The study has four specific objectives as outlined below: 1) To analyze the money supply and its effects on interest rate spread in Bangladesh. 2) To discuss the movement and trends for the interest rate spreads of the commercial banks in Bangladesh perspective. 3) To analyze the relationship among lending interest rate, broad money, inflation, quasi money, official ex-change rate and personal remittance.

Banking Sector and IRS in Bangladesh Commercial Bank
A bank that offers services to the general public and to companies called commercial bank. In brief, a commercial bank is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit. In fact, commercial banks, as their name suggests, axe profit-seeking institutions hat is they do banking business to earn profit. They generally finance trade and commerce with short-term loans.
They charge high rate of interest from the borrowers but pay much less rate of interest to their depositors with the result that the difference between the two rates of interest becomes the main source of profit of the banks. It is a financial institution that offers checking accounts, demand deposits, business and personal loans, savings vehicles and a variety of other related financial services commercial banks are owned by shareholders and are run for a profit, which is largely obtained by lending at rates higher than they pay their depositors. Commercial banking is different from investment banking, which primarily raises money for businesses, facilitates mergers or acquisitions, and works for institutional investor's.

Interest Rate Spread
Based

Literature Review
Studies to find out the determinants of spread of interest rate have been focusing on some factors However; a brief review of empirical studies that were conducted previously to determine the determinants of the spread of interest rate is demonstrated. Lot of attention has given to discover the important determinants of Interest Rate Spread. Some theoretical and imperial literature has explored various determinants of interest rate spread including Exchange rate, money supply, price level, demand for money, supply of money, remittance, inflation, interest rate spread, etc. A study was conducted nationally and internationally about the IRS in the following. Gambarcorta, (2004) studies factors that explain cross-sectional differences in spread of interest rate of banks in Italy. The study included both the micro and macroeconomic variables and the variables are operating cost, credit risk, interest rate volatility, loan demand and impact of monetary policy reflected by changes in policy rate. The study revealed that short term interest rate react less to monetary policy rate changes. In addition, the long term interest rate does not also change as banks don't feel to change long term interest rate frequently. Bank size has not been found to be an influential factor to determine interest rate spread. The study of Gambarcorta also found a positive relationship between spread of interest rate and GDP and inflation.

METHODOLOGY:
The main part of analysis variables is analytical part that shows the trend analysis using different statistical methods such as pie chart, column, line, bar diagram etc. In this part, researcher analyzed secondary data by using different statistical tools. Here, the researcher had done graphical analysis. Here researcher used secondary data of Bangladesh Bank based on the time series data from 1976-2018 periods from world development indicator, various publications of Bangladesh Bank and other sources.

Research Variables
Lending Interest Rate -An interest rate is the cost of borrowing money, or conversely, the income earned from lending money. Interest rates are expressed as percentage of the principal per period. He formula to find an interest rate of a loan is -

Interest rate = (Total Repayment Amount -Amount Borrowed)/(Amount Borrowed)
Let's assume XYZ Company is considering building a new $50 mil-lion factory. If a bank agrees to lend XYZ the $50 million dollars but requires XYZ to pay back $55 mil-lion at the end of the year, we can calculate that XYZ will pay $5 million ($ 55 million repaid -$50 million principal) to borrow the money. This translates to -

Interest rate = ($5 million) / ($50 million) = 10% interest
Quasi Money -Quasi-money is a term used in economics to describe highly liquid assets that can easily be converted into cash. In briefly, it describes highly liquid assets other than cash that can be quickly exchanged for cash. Examples of quasi money would include bank account balances, savings accounts, money fund, bank time deposits, certificates of deposit certificates of deposit and U.S. Treasury Bills. The amount of quasi money in an economic is often used by central bankers, economists and fundamental traders to compute the current level of the money supply in a country also called near money.
Broad Money -Broad money is the definition of the money supply which includes a wider scope for the definition of money. In economics, broad money is a measure of the money supply that includes more than just physical money such as currency and coins. Broad money includes notes and coins but also saving accounts and deposits in savings account. Broad money can also include treasury bills and gilts. These financial secure-ties are seen as near money broad money includes M 2 , M 3 , M 4 , M 4 growth has been weak. One measure of the money supply that includes m 1 plus savings and small time deposits, overnight repos at com-mercial banks and non institutional money market accounts.
Personal Remittance -A remittance is a transfer of money by a foreign worker to an individual in his or her home country. Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries. It also described personal remittances is sum of personal transfer and compensation of employees. Personal transfer a new item in the balance of payments manual 6 th edition (BPM), Workers' remittances are a significant part of international capital flows, especially with regard to labor-exporting countries.
Official Exchange Rate -An exchange rate which is imposed by the government called official exchange rate. Fixed exchange rate is the rate which is officially fixed by the government or monetary authority and not determined by market forces. Only a very small deviation from this fixed value is possible. In this system, foreign central banks stand ready to buy and sell their currencies at a fixed price. A typical kind of this system was used under Gold Standard System in which each country committed itself to convert freely its currency into gold at a fixed price.
Inflation -Inflation is the rate at which prices rise and purchasing power falls. It is why something that cost $1 in 1980 cost $2.37 in 2005. Two general theories explain inflation. The first, the demand-pull theory, says that prices increase when demand for goods and services exceeds their supply. The second, the costpush theory, says that companies create inflation when they raise their prices to cover higher supply prices and maintain margins. Inflation's fundamental relationship with supply and demand means that inflation directly or indirectly affects nearly every financial decision, from consumer choices to lending rates and from asset allocation to stock prices.
Growth Rate -The economy's above outlined growth track record is evidence enough that the financial sector has overall played its due role in mobilizing savings resources and allocating these to meet financing needs of the economy in ascending pace of sustained growth and structural transformation. Bangladesh's financial market structure developing as interlinked chain of intermediaries focused on specific market segments makes for better responsiveness to needs specific to the various market segments.

RESULTS AND DISCUSSION:
Trend Analysis -From the Table 1 and Fig. 1, during the period of 1976 to 2018, it can be seen that, the lending interest rate was not change at 0.874591 during 1976 to 1980 but after that periods it was increased in 1982 and same as 1984 and in 1986 it was 1.017896 up to 1992 but it was again decreased till 1999 at 0.973784. This ups and down situation was continue in the year 2018. So in lending interest rates in Bangladesh banking sector graph was showed an ups and down or fluctuation situation.

CONCLUSION AND RECOMMENDATIONS:
The study identifies several determinants underlying the determination of IRS in the commercial banking sector in Bangladesh. Banks are formed to ensure smoother financial activities of the country's economy. From the beginning people trust on the banking activities as well as their rules and regulation and keep their money for safety and security. In this study researcher tried to show the relationship between the lending interest 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 using time series data. In this study tried to find the relationship between these variables that the increasing in the lending interest rate can change the broad money, inflation, quasi money, official exchange rate and personal remittance. There is some limitation in this paper. Commercial banking sector is a big issue and it is difficult to collect primary data. So researcher only depends on secondary data source. But because of limited data of current ex-change rate, economic growth, function of commercial bank, researcher faces some problem and use proxy data. If researcher could collect proper data of banking sector, then this work would have been better from now. After analyzing the performance of the commercial banks of Bangladesh we can conclude the following points. Overall interest rate spread in the country's banking sector increased slightly in March as the commercial banks have slashed their interest rates on deposit more than that of leading rates, bankers said. The weighted average spread between lending and deposit rates offered by the banks rose to 4.86 per cent in March 2016 from 4.81 per cent in the previous month, according to the central bank latest statistics. It was 4.84 per cent in January 2016. To address these issues appropriate macro-policies, especially fiscal, monetary and trade policies combined with a set of heterodox policies, backed by political will and political stability (with democratic norms, rule of law and good governance), are necessary to enable the Bangladeshi economy to grow at an accelerated rate in the medium term and pave the way for Bangladesh to become a "success story" of overall development.

ACKNOWLEDGEMENT:
To being, I wish to thank Almighty Allah for keeping me to carry out this article and also I would like to thank to my colleagues who gives me their valuable suggestions in writing this article as well as all individuals who contributed directly or indirectly to the study's preparation, are acknowledged.

CONFLICTS OF INTEREST:
The author declares have no conflicts of interest in publishing this article.