Spike in funding costs strains Bangladesh banks’ profitability: Moody’s

| Updated: February 23, 2023 08:43:46

Spike in funding costs strains Bangladesh banks’ profitability: Moody’s

Spiking import costs, declines in remittance inflows, and high inflation have drained Bangladesh’s banking system of its liquidity, Moody’s Investors Service said in a report.

The credit rating agency said on Wednesday that banks were having trouble plugging liquidity shortfalls as the cost of borrowing from the interbank market or through the central bank’s repo rate had gone up materially, reports bdnews24.com.

A spike in settlements of letters of credit for importers in 2022 led to a dollar shortfall that banks attempted to plug by increasing the sale of taka for dollars. That tightened liquidity in the banking system, Moody’s said.

This has worsened as remittance inflows have slowed and high inflation has cut into deposits.

However, banks that have enough liquid assets or stable funding structures will be able to withstand the problem. Weaker banks with fewer government securities in their holdings will have difficulty getting funding from the interbank market, the agency said.

Though banks can fill this tightening of liquidity through borrowing, the cost of such funds has gone up materially as demand for them has grown and Bangladesh Bank has tightened its monetary policy to try and tamp down inflation.

The weighted average of interbank repo rates jumped to 8.1 per cent at the end of 2022 from 1.4 per cent at the start of the year, while the weighted average of interbank overnight rates rose from 2.7 per cent to 5.8 per cent, the highest since 2015.

The central bank also raised the repo rate at which it lends to banks to 6 per cent in January from 4.75 per cent at the beginning of 2022. While interbank rates somewhat moderated in February, the rates remain high.

It singled out Islamic banks as being more vulnerable because their liquidity buffers are smaller and their profitability is usually weaker.

Due to their weaker liquidity cushions and prohibitions on conventional interest-bearing government bonds, Islamic banks are more vulnerable, the report said. There is a limited amount of liquid shariah-compliant instruments in Bangladesh too, it added.

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