Bangladesh prepares for Libor phase-out
The Bangladesh Bank yesterday issued an insurance plan on calculating the interest of short-term foreign loans as the London Interbank Offered Rate (Libor) is defined to be eliminated steadily from next year.
The policy will help exporters and importers prepare for the discontinuation of the global benchmark rate to ensure that their borrowing does not suffer.
The Libor is a benchmark interest rate of which major global banks lend one to the other in the international interbank market for short-term loans.
Like almost all of the borrowers in other countries, Bangladesh's businesses also take foreign loans predicated on the rate.
The Financial Conduct Authority (FCA), which regulates the financial services industry in the United Kingdom, said in 2017 that the rate would be phased out slowly but surely from 2022 before abolishing it completely from July 2023.
According to the FCA, the Libor was struggling to reach its objective of assessing the price of bank borrowing as its activity had diminished sharply because the global financial meltdown in 2008.
The Libor, once dubbed the world's most important number, was discredited following the financial meltdown when authorities in the usa and Britain found traders had manipulated it to generate a profit, according to Reuters.
Against the backdrop, the BB yesterday issued a notice unveiling the policy for banks to calculate the interest on short-term foreign loans.
Banks will have to consider the benchmark rate of the respective central bank before setting a lending rate.
For example, if exporters intend to secure loans from the US, they have to follow the secured overnight financing rate (Sofr) set by the Federal Reserve, the central bank of the United States.
Together with the benchmark rate, borrowers will be charged a risk premium of 2.50 % and a markup rate of 3.50 %.
The markup is added following the lender determines an approved rate predicated on the consumer's credit score.
Local exporters and importers now enjoy short-term foreign loans at the cost of a 6-month Libor plus 3.50 per cent per annum.
If businesses receive loans from the banks in the Eurozone, the European Central Bank benchmark rate would have to be followed in setting the lending rate.
The ECB has produce the Euro short-term rate (€STR) benchmark rate, and the UK has introduced the Sterling Overnight Index Average (Sonia) benchmark.
A BB official said that the same method will be applicable for long-term foreign loans. The Bangladesh Investment Development Authority would think of a guideline to the end.
