The interest rates of financial institutions like banks will henceforth be determined depending on the market. So far the interest rates of financial institutions were determined depending on the SMART (Six Months Moving Average Rate of Treasury Bill) method of interest rate determination.

The central bank has informed that a maximum difference of 1 percent can be kept in the loan interest rate gap by product. Interest rate can be re-fixed once in six months and market based. Whether the loan is variable or fixed should be written at the time of granting the loan.

Bangladesh Bank has issued a notification regarding this on Sunday. As a result, the interest rate will increase, said officials of financial institutions.

According to the notification of the central bank, the smart interest system has been withdrawn in order to make the loan/lease/investment and deposit interest rates of finance companies completely market-based by following international best practices. Henceforth, interest rates on loans and deposits will be determined based on the demand for loans and the supply of loanable funds.

However, it has been said in the notification that certain rules must be followed in determining market-based interest rates. For example, sector-wise loan interest rates and deposit interest rates are published on the website. Interest rate can be varied up to 1 percent within the limit determined by the customer considering the risk. No more interest can be charged on loans and deposits than declared.

The central bank also said that the type of interest i.e. whether it is fixed or variable should be specified in the loan sanction letter. In case of variable interest rate, the interest rate fixed in the sanction letter cannot be increased within six months of disbursement of loan. Thereafter the interest rate may be re-fixed every six months as per the market conditions.