The Bangladesh Bank is looking to move away from the SMART system, which currently sets loan interest rates, sources in the central bank confirmed.

This aligns with the International Monetary Fund (IMF)'s recommendation for a market-driven approach to setting these rates. The SMART system, introduced last July after the removal of the 9% lending rate cap, uses the six-month average treasury bill rate.

Following the implementation of the SMART system, the Bangladesh Bank has published the benchmark rate on the last working day of each month. However, this did not occur on the last working day of April.

Consequently, banks and non-bank financial institutions (NBFIs) are currently lacking this crucial information and may be forced to rely on the existing reference rate to determine loan prices.

This potential suspension of the rate-setting formula coincides with an IMF mission's visit to Dhaka to assess the progress of the $4.7 billion loan program. The mission has already engaged with various stakeholders, including the Bangladesh Bank.

The success of this IMF mission will determine if Bangladesh receives the crucial third tranche of its $4.7 billion loan program.

The Bangladesh Bank's decision to move away from the SMART formula follows a period of persistent inflation despite significant increases in the policy rate.

This earlier inflation is attributed to a combination of factors, including readily available cheap credit due to the previous lending rate cap and potential mismanagement within the financial markets. Even after the introduction of the benchmark rate and the removal of the lending cap, inflation has remained high for almost two years.

Local experts and the IMF believe the SMART formula effectively functions as a hidden interest rate cap. This is because banks can add a margin of up to 3.75 percentage points on top of the SMART rate when setting lending rates.

Besides, the central bank has control over determining the SMART rate itself, since it is based on the average treasury bill rate.

So, essentially, the central bank retains significant influence over interest rates through the SMART system, despite its intention to move towards a market-based approach, critics pointed out.

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