Inflation Effect on Commercial Banks Lending Rate in Bangladesh

Abstract

The purpose of this study was to determine the relationship between annual inflation rate and Bangladesh Commercial Bank base lending rate, new lending volumes and loans defaulting. This study was guided by the following three research questions: (i) (ii) (iii) What is the relationship between annual rates of inflation rate and base lending interest rate in Bangladesh from the year 2011 to 2024? What is the relationship between both inflation rate and base lending rate and Bangladesh Commercial Bank new annual lending volumes from the year 2011 to 2024? What is the relationship between inflation rate and Bangladesh Commercial Bank annual loan default rate? The first major findings were the positive relationship between inflation rate and the base lending rate charged by the bank, as inflation levels rises, so did the bank’s base lending rate both from the key informant figures and the regression analysis of the secondary data, showing that inflation has a significant effect on Bangladesh Commercial Bank base lending rate. The second major finding was that inflation has moderate effect on Bangladesh Commercial Bank new lending volumes; however, an increase in base lending rate contributed most towards the reduction in the lending volumes. The third finding revealed that a rise in inflation led to high rate of loan defaulting activities in the bank. Based on the findings various recommendations were made. First the banks should have policy on minimum base lending rate to be charged on loans and in order to maintain this, the bank would need to diversify to other sources of incomes streams such as aggressively undertaking non interest related activities e.g., collection of commission and fees, to cushion it during high inflation period when the uptake of loans dwindle since the organization has no control of macroeconomic factors affecting the inflation of the country. Secondly the bank can encourage borrowers to take fixed interest loan repayment offers, rather than the flexible repayment models to reduce the rate at which loans are defaulted as a result of fluctuation of the repayments amounts