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http://www.thefinancialexpress-bd.com/2016/02/06/14330
FIXED INTEREST RATE: In fixed interest rate, the interest to be paid is fixed in advance when
extending loan. The borrower knows the exact amount he needs to pay or the exact interest rate
on outstanding loan.
FLOATING INTEREST RATE: In case of floating interest rate, the interest rate is not determined
while lending. The London Inter-bank Offered Rate (LIBOR) is the average interest rate estimated
by leading banks in London that the average leading bank would be charged if borrowing from
other banks. LIBOR or ICE LIBOR is a benchmark rate that some of the world's leading banks
charge each other for short-term loans. This rate keeps on changing on a daily basis and thus
the interest rate at which a lender borrows will also keep changing. However, this change is not
made on a daily basis but is done once a year/six months and the interest rate is thus fixed till
the next update.
OTHER METHODS: The change in interest rate is usually tied to movement of an outside indicator,
such as the prime interest rate. Movement above or below certain levels is often prevented by a
predetermined floor and ceiling for a given rate. For example, you might see a rate set at "prime
plus 2.0 per cent". This means that the rate on the loan will always be 2.0 per cent higher than
the prime rate, which changes regularly to take into account changes in the inflation rate.
In many countries, floating rate loans and mortgages predominate. They may be referred to by
different names, such as adjustable rate mortgage in the USA. In some countries, there may be
no special name for this type of loan or mortgage, as floating rate lending may be the norm. For
example, in Canada, all mortgages are worked out on floating rates; borrowers may choose to
"fix" the interest rate for any period between six months and ten years, although the actual term
of the loan may be 25 years or more.
The commercial banks in Bangladesh are not 'listening' to BB on the excuse that since interest on
certain saving instruments applicable to retired government servants are high, they are unable to
lower interest on other deposits. However, interest rates on credit and deposit in Bangladesh
slowly declined by a small percentage in recent times.
Though the interest rate policy is market-based, the central bank often sets the maximum cap for
loans in different priority sectors considering national interest and overall macroeconomic
situation. For example, the current ceiling on interest rates for pre-shipment export credit is 7.0
per cent and for agricultural loans it is 11 per cent. The effective rate of interest for the Export
Development Fund (EDF) is less than 3.0 per cent. According to the central bank, no more than
10 per cent interest rate can be charged under the BB refinancing scheme for SMEs (small and
medium-sized enbterprises) and women entrepreneurs, while 4.0 per cent rebate is applicable to
agriculture sector for cultivation of pulses, oilseeds and spices.
Banks in Bangladesh has a more or less fixed rate policy and there is no other option like floating
or inflation-based loans. The BB has a special policy of reduced interest rate on loans from its
Export Development Fund (EDF) to help exporters get low-cost funds.
BB can intervene and change the policy of interest on loan and reduce the interest rate on
deposit to see how these affect consumption and investment in products and services.
The writer is a Legal Economist.
mssiddiqui2035@gmail.com