The Bangladesh Bank (BB) is considering abandoning the Six-month Moving Average Rate of Treasury bills (SMART) formula for setting loan interest rates. This move aligns with recommendations by the International Monetary Fund (IMF) for a market-driven approach.
The SMART system, introduced in July 2023 to replace a 9% lending rate cap, sets a benchmark rate published monthly by the central bank. However, the April rate hasn’t been released, leaving banks and financial institutions in limbo.
This development coincides with an IMF mission currently in Dhaka to assess Bangladesh’s progress on a $4.7 billion loan program. The mission’s findings will determine the release of the program’s third tranche.
The IMF and local experts argue that the SMART system doesn’t reflect true market rates. Here’s why:
Despite the SMART system and a scrapped lending rate cap, inflation remains high. The 3.75% spread banks can add to the SMART rate and the BB’s control over the SMART itself suggest a lingering interest rate cap. The BB’s purchases of government securities at lower rates than commercial banks distort market forces.
While the IMF advocates for market-determined rates, businesses fear rising interest rates could hurt the economy. Loan costs have already increased under the SMART system.
Experts propose these solutions of Gradually transition from SMART to a fully market-driven system. Allow for interest rate adjustments based on market conditions.
The future of Bangladesh’s loan interest rate system remains uncertain. The BB may abandon SMART, but concerns linger about potential economic impacts. Finding a balance between market forces and economic stability will be crucial.