The Bangladesh Bank, central bank of Bangladesh, is considering abandoning the SMART formula, currently used to set loan interest rates, aligning with the International Monetary Fund’s (IMF) recommendation for a market-based system.

This is as per media reports, which added last July, the central bank removed the 9 per cent lending rate cap, introducing the Six-months Moving Average Rate of Treasury bills (SMART). However, the publication of the benchmark rate on the last working day of each month did not occur in April, leaving banks and non-bank financial institutions (NBFIs) uncertain, possibly relying on the current reference rate for loan pricing.

The potential suspension of the rate-setting formula coincides with an ongoing IMF mission in Dhaka to evaluate the progress of the $4.7 billion loan programme. The outcome will determine whether Bangladesh receives the third tranche of credit.

The SMART formula was implemented due to persistent high consumer prices despite policy rate spikes, attributed to cheaper funds from interest rate ceilings and market mismanagement.

According to a senior central bank official, local experts and the IMF perceive a lingering interest rate cap due to SMART. Banks can add up to 3.75 percentage points to the SMART rate for lending, controlled by the central bank.

The World Bank had suggested the introduction of a benchmark lending rate for a transition from rate caps to market-determined rates post-SMART implementation even as the IMF recommended allowing the market to determine lending rates as SMART is not market-based. However, there are concerns among the business community about the impact of rising interest rates on the economy.

Fibre2Fashion News Desk (DR)

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