Policy suggestion from IMF
According to the newspaper report, IMF has recommended a reduction of the interest rates on the government securities (bills and bonds) in Bangladesh. In the current financial environment of the country, such a reduction does not make any sense. This will be a suicidal step for the money market of Bangladesh which is only in its embryonic stage.
One of the main problems pertaining to our banking and financial sectors is the absence of competition. The primary market for government securities is very small, and the secondary market for them is practically missing. Therefore bank deposit is the only option for the savers to invest their money.
The growth of the urban middle class and emergence of a new generation of savers make it possible for the commercial banks in Bangladesh to collect deposits even by offering a low rate of interest. On the other hand, they charge very high rate of interest on commercial and industrial loans. Thus they enjoy a golden opportunity to make high profit in Bangladesh.
Given the small size of the primary market for government securities and missing secondary market for them, there is no credible threat for the commercial banks to lose deposits to the government securities. As a result there is no incentive for them to increase the interest rate on deposit. A reduction of the interest rate on government securities as suggested by IMF will help the banks to cut their interest rate on deposit which is already low. Such a reduction will enable the banks to increase their profit margin which is already very high in Bangladesh.
It is because of the high rate of profit the commercial banks can afford to operate inefficiently, requiring no effort to improve their services to the customers or to make them easily available to the people. The policy suggested by IMF will simply contribute to this inefficiency.
In the present economic environment, there should be an increase in the interest rate on government securities. This will not only make them attractive to the savers but will also compel the commercial banks to increase their interest rates on deposits. Thus it will redistribute part of the abnormally high profit of the commercial banks to the savers. At the same time, it will force the banks to increase their operational efficiency. Therefore, the policy makers in Bangladesh should not decrease the interest rates on government securities as suggested by IMF; rather they should explore the feasibility to increase them for the sake of a robust money market.
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