Financial reforms and persistently high bank interest spreads in Bangladesh: Pitfalls in institutional development?

This paper analyzes interest rate spreads and margins in Bangladesh for the period 1990–2008 by applying the Arellano–Bover/Blundell–Bond dynamic panel regression model to a panel of 43 banks. The model has been applied to tackle short-panel bias and endogeneity problems in banking analysis. A high degree of persistency in spreads and margins is observed, which points to inefficiencies of bank management. More specifically, high administrative costs, high non-performing loan ratio, market power, small share of deposits and some macroeconomic factors are found to be the key determinants of persistently high interest rate spreads and margins in Bangladesh. The findings of this study suggest that reforms commenced in the 1990s could not generate adequate competition and efficiency in the financial sector, particularly to drive down the spread in line with the predictions of interest rate literature. This situation in other words indicates pitfalls in institutional development.