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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.