Bangladesh prepares for Libor phase-out

The Bangladesh Bank yesterday issued a policy on calculating the interest rate of short-term foreign loans as the London Interbank Offered Rate (Libor) is set to be phased out gradually from next year.

The policy will help exporters and importers prepare for the discontinuation of the global benchmark rate so that their borrowing does not suffer.  

The Libor is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.

Like most of the borrowers in other countries, Bangladesh's businesses also take foreign loans based 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 gradually from 2022 before abolishing it completely from July 2023.

According to the FCA, the Libor was unable to reach its objective of assessing the cost of bank borrowing as its activity had diminished sharply since the global financial crisis in 2008.

The Libor, once dubbed the world's most important number, was discredited after the financial crisis when authorities in the United States and Britain found traders had manipulated it to make a profit, according to Reuters.

Against the backdrop, the BB yesterday issued a notice unveiling the policy for banks to calculate the interest rate on short-term foreign loans.

Banks will have to consider the benchmark rate of the respective central bank before setting a lending rate.

For instance, if exporters plan to secure loans from the US, they will have to follow the secured overnight financing rate (Sofr) set by the Federal Reserve, the central bank of the United States.

Along with the benchmark rate, borrowers will be charged a risk premium of 2.50 per cent and a markup rate of 3.50 per cent.

The markup is added after the lender determines an approved rate based on the consumer's credit history.

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 come up with 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 would be applicable for long-term foreign loans. The Bangladesh Investment Development Authority would come up with a guideline to this end.