This paper uses a bank profit maximisation model based on empirical industrial organisation approach to explain the interest rate spread (IRS) in the banking sector of Bangladesh using panel data of 48 banks covering the period of 2004 to 2008. The analysis shows that the higher the non-interest income as a ratio of total assets of a bank, the lower its spread. Similarly, market share of deposits of a bank, statutory reserve requirements, and NSD certificate interest rates affect the IRS. The analysis in terms of bank groups shows that IRS is significantly influenced by operating costs and classified loans for state owned commercial banks (SCBs) and specialised banks (SBs); while inflation, operating costs, market share of deposits, statutory reserve requirements, and taxes are important for the private commercial banks (PCBs). On the other hand, non-interest income, inflation, market share, and taxes matter for the foreign commercial banks (FCBs). The analysis brings out several systemic actions and measures at the bank level to improve earnings and profitability of the banks which are sustainable tools of reducing the IRS. The Bangladesh Development Studies Vol. XXXII, December 2009, No. 4 An Analysis of Interest Rate Spread in the Banking Sector in Bangladesh MUSTAFA K. MUJERI * SAYERA YOUNUS * I. INTRODUCTION The difference between lending and deposit interest rates, known as the interest rate spread (IRS), is an important determinant of the efficacy of the financial system in a country. There are, however, alternative ways of measuring IRS in the * Director General, Bangladesh Institute of Development Studies (BIDS) and Senior Research Economist, Policy Analysis Unit, Bangladesh Bank respectively. The views expressed in the paper are the authors' own and do not necessarily reflect those of the organisations with which they are associated. The authors are indebted to an anonymous referee of this journal for useful comments and suggestions on earlier drafts of the paper. The authors are, however, responsible for any remaining errors.