# Determinants of Interest Rates in Bangladesh

Executive Summary……………………………………………………………….2 Introduction………………………………………………………………………..2 Origin of the report………………………………………………………………...2 Objective of the report……………………………………………………………..2 Scopes and Limitations…………………………………………………………….3 Methodologies……………………………………………………………………...3 Interest rate and its determinants…………………………………………………3-5 Analysis of regression equation………………………………………………….6-7 Analysis of correlation matrix……………………………………………………7-8 Conclusion…………………………………………………………........................8 Bibliography……………………………………………………………………….8

Determinants of Interest Rates in Bangladesh

Executive Summary:

Interest rate is applicable on all type of lending allover the world. Lending can be of different types, but in this report we will be concerning about the determinants of interest rate on commercial lending in Bangladesh. Interest rates can be determined by many factors but here we will consider six factors as the determinants of interest rate. These six factors are Gross Domestic Product (GDP), Consumer Price Index (CPI), Budget Deficit, Money Supply, Remittance and Foreign Direct Investment (FDI). In this report we will try to find out how these factors affect the weighted average rate of interest on commercial lending and the relationships between each of the factors and the interest rate. To find the effect of the factors on interest rate we will analyze the regression equation and to find the relationship we will analyze the correlation matrix. We will use statistical software which is called SPSS to produce the regression equation and correlation matrix. To make a proper report we need a large pool of data and we decided to collect data from 1981-1982 to 2007-2008. We collected data from Economic Trends published by Bangladesh Bank, Economic Review published by Finance Ministry of Bangladesh Government, website of Bangladesh Bank and website of ministry of finance. But we were unable to find all the necessary data from 1981-1982 to 2007-2008, in some cases data are missing, in some cases the data bases are different and many other problems. We found that all the data are available from 1996-1997 to 2007-2008. So we will try to analyze these data and make a proper report.

Introduction:

This report is about the determinants of interest rate. Any change in the interest rate is generally caused by these factors and the factors are Gross Domestic Product (GDP), Consumer Price Index (CPI), Budget Deficit, Money Supply, Remittance and the Foreign Direct Investment (FDI). Any change in any of the determinant is responsible for the change in interest rate. Here we will try to find out how the determinants affect the interest rate and what are their relations with the interest rate?

Origin of the report:

Preparing a formal report based on a topic given by the course instructor of FIN 335 course is compulsory for all students. Our course instructor, Mr. Md. Lutfur Rahman gave us the opportunity to learn about the Determinants of Interest Rates in Bangladesh. He gave us the topic and proper instruction to complete the formal report in a proper manner. So, we tried to follow all the instructions and complete the report.

Objective of the report:

Objectives are the end points toward which activities are aimed. Like this, we have also some objectives to prepare this report. These are written below: ▪ To learn about the determinants of interest rates in Bangladesh. ▪ To learn how the determinants or factors affect the weighted average rate of interest on commercial lending ▪ To learn about the relationships between each of the factors and the weighted average rate of interest on commercial lending. Scopes:

In this report we tried to give a brief idea about the determinants of interest rates in Bangladesh but availability and the inconsistency of data is the main problem that we faced wile making this report. We used SPSS to analyze the data, so the report would be more justified if we...

Bibliography: 1. Economic Trends, Statistics Department, Bangladesh Bank (August 2009); Page # 13, 38, 45, 46, 75, 79 & 91.

2. Bangladesh Economic Review 2000, Economic Adviser 's Wing, Finance Division, Ministry of Finance; Page # 172, Appendix – 45.

3. Bangladesh Economic Review 2008, Economic Adviser 's Wing, Finance Division, Ministry of Finance; Page # 239, Appendix – 1.1 & Page # 292, Appendix – 55.

4. Bangladesh Bank Website: www.bangladesh-bank.

5. Ministry of Finance Website: www.mof.gov.bd

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