Bangladesh Bank has said interest rates in the country have declined and banks are free to fix the level and
structure of interest rates under the market-based interest rate policy, in a clarification issued Tuesday amid the ongoing debate on interest rates.

In the statement, the central bank said the board of directors of different banks determine interest rates based on their own
considerations of profitability. Though the interest rate policy is market-based, Bangladesh Bank often sets the maximum cap for loans in different priority sectors considering the national interest and overall macroeconomic situation. The current ceiling on interestrates for pre-shipment export loans is 7 percent and for agricultural  loans is 11 percent.

The BB mentioned that the effective rate of interest for the Export Development Fund (EDF) is less than 3 percent. As of today, Taka 235 billion has been financed with the EDF to the export-oriented enterprises. Around Taka 260 billion has been disbursed to the buyers' credit sector at 6 percent interest rate. The agricultural credit disbursement target for FY 2014-15 is Taka 160 billion, of which 72 percent has been disbursed during the first nine months of the current fiscal.

According to the central bank, no more than 10 percent (9 percent in most cases) interest rate can be charged under the Bangladesh Bank refinancing scheme for SMEs and women entrepreneurs, while 4 percent rebate rate is applicable for the agriculture sector for cultivation of pulses, oilseeds, and spices.

It said Bangladesh Bank has also submitted a proposal to the Ministry of Finance for providing SME loans to the dairy farms at a similar rebate rate. Taka 57 billion has been refinanced against loans to the SME sector till date. Businessmen now can avail loan facilities from foreign sources at lower rate (London Interbank Offer Rate or LIBOR plus 3 to 4 percent, which is less than 5 percent).

Over the last five years, Bangladesh Bank has approved around Tk 500 billion of loans from foreign sources. These low-cost EDF, buyers' credit, agricultural credit, SME refinance, and foreign loans are significantly contributing towards reducing interest rates in the domestic financial market. Moreover, there is a rebate on accrued rate of interest for good borrowers.

The statement said interest rate depends mainly on banks' cost of funds, administrative costs, provision expenses, profit margins, and so on. The overall cost of fund for banks is decreasing due to rationalization of various service charges, fees, commission charges, etc, avoiding high expenditure to establish bank branches, and adoption of policies towards limiting expenditure for the purchase of transport vehicles.

Though banks' one-time initial costs have increased a bit because of implementation of information technology as instructed by Bangladesh Bank, the cost of funds is gradually falling over time. In recent months, lending rate has not declined at the same pace as the deposit rate; however, with intensive monitoring and moral persuasion from Bangladesh Bank, both the lending rate and the interest rate spread have decreased to 11.93 percent and 4.87 percent respectively.

At the same time, the rate of inflation has been falling steadily with prudential monetary management from Bangladesh Bank. At the end of April 2015, the average annual rate of inflation stood at 6.57 percent, claimed the BB statement.