KARACHI INTER BANK OFFER RATE

(KIBOR)

Hanam Kausar F11BA167

Sidra Nazar F11BA119

Mohsin Habib F11BA126

Umar Shaharyar F11BA120

Group Members

KIBOR is the average interest rate at which banks wants to lend money to other banks.

It is given by specialized institution(SBP,PBA) to all the commercial banks of Pakistan so that they charge interest to their customers on that basis. This rate is inflation adjusted rate and then banks by adding 2 or 3% in KIBOR rate charge their customers for their profit

Defination

In Year 1999 Summary for KIBOR was presented

In Year 2001 It was Implementated on Money Market

In Year 2004 It was used as Reference Rate for Corporate

Lending In Feb 2004

for the first time, KIBOR-related lending rates to corporate customers

History

The KIBOR was launched in 2001 and in 2004 its scope and operation was expanded. Since it has started, almost every bank of the country preferred to devise its own mechanism for determination of KIBOR and it evoked serious reaction from private sector.

The SBP in consultation with the Pakistan Banks Association has introduced KIBOR as a reference rate for corporate lending to make interest rates more market-driven.

The Habib Bank Ltd (HBL) has become the first commercial bank which has linked its Karachi Inter-Bank Offered Rate (KIBOR) related financing with State Bank of Pakistan (SBP).

Introduction

Before 2002, the banking sector has used PKRV

(Pakistan Re-valuation Rate) rates instead of KIBOR.

Every bank and corporation has their own interest

charges.

There was no centralized system.

Some banks charge higher and some charge lower rates.

SBP decided that there must be a standard system.

Need of KIBOR

Short Tenure 1 week 2 week 1 month 3 month 6 month

Long tenure 1 Year 3Year

Maturity/Tenor

How to Calculate Kibor

PBA (Pakistan Banks Association)

FMA (Financial Markets Association)

SBP: (State Bank of Pakistan) It gives rules and regulations.

Authorities responsible for calculation of KIBOR

Methodology

There is No specific formula State bank of Pakistan (SBP) calculate it.

Every morning SBP demands quotations for lending/borrowing rates of (1-week rates to 3-year rates) from Primary Dealer i.e. around 20 strong commercial Banks of Pakistan and these rates are floated on Reuters……

SBP eliminates 4 Top quotes from higher side and 4 bottom quotes from lower side and take the Average of Quotations of in-between....... That’s the KIBOR for the day.

Around 11 A.M every working day it is

provided by SBP. Authenticity is confirmed by making the

contributors liable to accept Bid/Offer within 15 minutes from the time of up date up to Rs 100 million of Lot Size by Contributor Banks.

Methodology

BENCHMARKING: Is the process of comparing one's business processes

and performance  to industry bests or best practices from other industries. Dimensions typically measured are quality, time and cost.

To encourage transparency

Promote consistency in market based pricing

Improve management of the market risk

undertaken by banks.

No Security problems

KIBOR as a Benchmark

Transparency

True picture of profit margin

Awareness of profit margin

Tell ‘s about cost of deposits

Cost of deposits is low profit margin is low

Market Risk Management

KIBOR help to protect from market risk

Help to maximize the upcoming risk

Customer is not being charged with more interest

Security

They are unsecured loans

Banks don’t need security against these loans.

For borrowing less than KIBOR

For lending more than KIBOR Difference of margin = Profit

Benchmark For Transactions

Top 5 banks of Pakistan which contribute for 75% of banking sector:

HBL (Habib Bank Limited) MCB (Muslim Comercial Bank) NBP (National Bank of Pakistan) UBL (United Bank Limited) ABL (Allied Bank Limited)

Contributor Banks

Its updated daily at 11:30 am on following:

SBP website FMA website Reuters/Bloomberg

Publishing of KIBOR

Reuters is an international news agency which is also a provider of financial market data. It has built a reputation in Europe and the rest of the world as the first to report news scoops from abroad.

KIBOR flashed on Reuters on September 7, 2001.

Reuters has helped our market come a long way.

It is quoted on Reuters by 20 commercial banks.

It is updated at 11.30 AM daily on Reuters.

KIBOR disseminated on Reuters network.

What Is a Reuters & Its link with KIBOR

Tenor BID OFFER1 - Week 9.87 10.372 - Week 9.88 10.381 - Month 9.88 10.383 - Month 9.93 10.18

6 - Month 9.93 10.189 - Month 9.94 10.441 - Year 9.96 10.46

2 - Year 10.61 11.113- Year 11.65 12.15

As on.

14-Apr-14

Data source: Reuters

BID RATE Rate the bank wish to pay on any borrowingOFFER RATE Rate the bank will want to receive on any lending BID rate is always less than OFFER rateFLOOR A bank shall not decrease rate than floor rate CAP A bank shall not increase rate than the cap rate This is used in exception cases Bank never goes up the ceiling nor goes below the floor.

Important terms in Kibor

Margin depends on three factors:

Tenor of the deal : Profit margin depends on the time for which loan is given/taken. Generally, the longer the term, the higher the rate.

Liquidity level: The more the bank is in need of cash, usually the higher is the interest rate it offers.

Credit quality: : Lower rates are offered to customers with more credit worthiness.

Factors that determine Kibor

1.Cost of deposits2.Administration cost

3.Customer

Other factors that determine KIBOR

Cost On deposits

The cost that a bank has to pay for the funds that he uses to lend to earn profit in shape of interest

COD then KIBOR

Rate decision is of customer

If the buyers are not willing to pay the price (interest) the merchant (banks) has to readjust the price to sell (loans).

Administration Cost

Heads of bank’s expenses

Most important head is “Transaction cost”

Cost KIBORCustomer

If the rate for a tenor is not acceptable for any of the two parties (bank or customer) or both, they can change the tenor of transaction and agree on a tenor for which KIBOR is suitable for them.

Can it be Changed?

Factorz link with kibor

Interest rate(Direct Relationship)Rate of inflation(Direct Relationship)Purchase power(Inverse relationship)Discount rate (Direct Relationship)Balance of payment(Inverse relationship)

Economic factors that influence KIBOR

Where Kibor is Applicable & Where Not

All floating and fixed rate term loans.

TFC’s (Term Finance Certificates)

Commercial Papers

Overdrafts/Running Finance

Applicable on

Export finance scheme

Consumer financing and SME lending

Overdrafts and running finance facilities

existing before January 31, 2004

All term loans with agreements executed

before January 31, 2004.

Not Applicable on

Balance Interest rate riskKIBOR as benchmarkHelp Banks create better products for the

customer

KIBOR EFFECTS ON MONEY MARKET

PAKISTAN BANKS’ ASSOCIATION (PBA)

Pakistan Banks’ Association (PBA) represents the Pakistan Banking Industry. Established in 1953, its main objective is to coordinate the efforts of the banking industry, and to share a common vision of progress and development with its members. 

The SBP in consultation with the Pakistan Banks Association has introduced KIBOR as a reference rate for corporate lending to make interest rates more market-driven.

Role of PBA….

FINANCIAL MARKET ASSOCIATION OF

PAKISTAN(FMAP)

The Financial Markets Association of Pakistan was formed in 1997, is a Non-commercial, Non-profit, Self-financed and Professional Association of Dealers of Financial Instruments. The members of the Association are drawn from Dealing Room Staff of all Nationalized Banks, Foreign Banks, Private Sector Banks, NBFC's and Interbank Brokerages Houses. FMAP is affiliated with "Association Comb site International - Paris". FMAP is also recognized as Self Regulatory Organization (SRO) by the State Bank of Pakistan and incorporated under section 42 of the companies ordinance, 1984

KIBOR is published by the Financial Markets Association of Pakistan in case the Reuters page is unavailable

FMAP ensures timely and error-free availability of the kibor rates.

FMAP selected the dealers of the 20 strong commercial banks of Pakistan

Role of FMAP….

FMAP has certain conditions for every tenor, some basis points can be added to or subtracted from KIBOR.

These are:50 basis point for 1,week, 2 week and 1

month25 basis point for 3 months and 6 months50 basis point for 9 months,1 year,2 year

and 3 years

Role of FMAP….

KARACHI OVERNIGHT INDEX AVERAGE(KONIA)

Interest rate for overnight lending and borrowing

Timings“KONIA” rate will be update on Reuters by 12:30 pm from

Monday -Thursday

On Friday & Saturday, it will be updated at 12:05pm.

vs.

Islamic vs. Commercial Banking

Islamic Profit base Use as Benchmark for Profit IBOR ( Islamic Inter-Bank Offer Rate)

Conventional Interest Base Use as Benchmark for Profit KIBOR

In Islamic Banking, KIBOR is just used as benchmark for profit. It decides how the profit should be distributed to maintain standardization in market.2. There is separate discussion on IBOR (Islamic Inter-bank Offer rate ), for Islamic banking which will soon be implemented.