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Nexus between the banking sector interest rate spread and interbank borrowing rate: An econometric investigation for Bangladesh

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  • Kashem, Mohammad Abul
  • Rahman, Mohammad Mafizur

Abstract

This study examines the causal relationship among Interest Rate Spread11Definition of IRS is based on the Guidelines of Entrepreneur Data Warehouse (EDW), Bangladesh Bank (BB), Statistics Department. (IRS), investor and depositor burden of IRS and interbank borrowing rate of Bangladesh for the period April 2009–November 2015. By taking care of all properties of time series data the paper has addressed the issue of short run dynamics within the long run relationship of these four variables. The empirical results show that aforementioned four variables are highly cointegrated, implying that there is a stable long run relationship among them. Similarly, the estimated error correction model shows that there is bi-directional causality among these four variables. However, Granger causality test shows that there is a unidirectional causality running from IRS and interbank borrowing rate to both investor and depositor burden of IRS and there is a bi-directional causality between IRS and interbank borrowing rate implying that when IRS increases both depositors and investors suffer and interbank borrowing rate (hence, monetary policy) has significant role to play in the reduction of IRS and its' components in Bangladesh. Our findings also confirm that Bangladesh investors bear the major portion of IRS burden.

Suggested Citation

  • Kashem, Mohammad Abul & Rahman, Mohammad Mafizur, 2018. "Nexus between the banking sector interest rate spread and interbank borrowing rate: An econometric investigation for Bangladesh," Research in International Business and Finance, Elsevier, vol. 43(C), pages 34-47.
  • Handle: RePEc:eee:riibaf:v:43:y:2018:i:c:p:34-47
    DOI: 10.1016/j.ribaf.2017.07.173
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    References listed on IDEAS

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    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    2. Hossain, Monzur, 2012. "Financial reforms and persistently high bank interest spreads in Bangladesh: Pitfalls in institutional development?," Journal of Asian Economics, Elsevier, vol. 23(4), pages 395-408.
    3. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
    4. Chu V. Nguyen, 2012. "Asymmetric responses of commercial banks to monetary policy in a transitional economy:the case of Vietnam," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 2(3), pages 1-9.
    5. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    6. Kaiguo Zhou & Michael C. S. Wong, 2008. "The Determinants of Net Interest Margins of Commercial Banks in Mainland China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(5), pages 41-53, September.
    7. R. Gaston Gelos, 2009. "Banking Spreads In Latin America," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 796-814, October.
    8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    More about this item

    Keywords

    Interest rate spread; Interbank borrowing rate; Time series data; Bangladesh;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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