Karachi Inter Bank Offer Rate Group 2

(KIBOR)

Introduction

History Year 1999:

Summary for KIBOR presented Year 2001:

Implementation on Money Market Year 2004:

Used as Reference Rate for Corporate Lending

What is KIBOR ???

Karachi Interbank Offered Rate (KIBOR)

Quoted on Reuters by 20 commercial

banks (as selected by FMA - Financial

Markets Association of Pakistan). Updated at 11.30 AM daily on Reuters by

excluding Out-layers, 4 extremes on higher and 4 extremes on lower side.

What is KIBOR ???Contd…

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

FMA ensures timely and error-free availability of the rates.

With effect from 31st January 2004 Karachi Interbank Offered Rate (KIBOR) is used as the benchmark for all corporate lending.

Currently KIBOR is quoted for tenors ranging from 1-week to 3-years.

Need for KIBOR

Need to Benchmark ( Borrowing / Lending Rates)

Harmonize operations of financial markets Encourage transparency, Promote consistency in market based

pricing, Improve management of the market

risks

Types of KIBOR rates

Shorter Tenure 1 week 2 week 1 month 3 month 6 month

Longer Tenure 1 year (31 march, 2004) 3 year (31 december, 2004)

KIBOR Applicable to…

All floating and fixed rate time loans TFCs Commercial Papers Overdrafts / Running Finance

KIBOR not applicable to…

Financing under Export Finance Scheme of the State Bank of Pakistan.

SME Financing

Methodology

Rates published on Reuters Page daily Banks and the borrowers are free to

decide on the relevant tenor of KIBOR and the spread over KIBOR at their discretion.

Will be set for the lending facility on the date of draw-down.

Offer Letter to the client should clearly indicate the KIBOR’s tenor plus agreed spread, frequency of revision etc

KIBOR– BID/OFFER RATES

BID rate Rate the bank wish to pay on any

borrowing OFFER rate

Rate the bank will want to receive on any lending

Bid rate is always less than Offer rate.

KIBOR Floors & Caps

Floors A bank shall not decrease rate than the

floor rate Caps

A bank shall not increase rate than the cap rate.

This is used in exceptions cases.

How KIBOR is calculated

No Specific Formula Balancing of Payments Purchase Power Inflation Control Rates contributed by money

market brokers/contributors on daily basis.

Effects on Money Market

Interest Rate Risk KIBOR as benchmark Help Banks create better products

for the customers

Launch of KIBOR Futures

A very significant milestone has been achieved by the listing of Kibor Futures Contracts on National Commodity Exchange Limited (NCEL).

Launching of this new product was an essential prerequisite for Banks, Brokers, Financial Institutions and Corporate to start familiarizing themselves with it

Advantages Of KIBOR Futures Interest rate risk is ubiquitous : Similar to changes in prices of other

assets, interest rate changes also create uncertainty for businesses.

Like all other futures, interest rate futures also provide the essential service of reducing risk and uncertainty and help in better business planning and management.

To help Banks create better products for customers: Interest rate futures have very

fundamental benefits for financial markets.

The chief advantage is to have a tradable yield curve which provides information about the market’s consensus view regarding the future path of interest rates.

Contd..

Interest rate futures have a history of almost 30 years ever since they were first launched in the US. They have proved to be a fundamental building block of interest rate markets and have shown their strength and usefulness in every jurisdiction.

With the launch of Kibor futures, banking and financial sector as well as the rest of the pakistani economy will be able to benefit in the same way as the rest of the world has.