KARACHI INTER BANK OFFER RATE

(KIBOR)
KIBOR is an average rate at which bank wants to lend money to other bank It is
provided by specialized institution (SBP, PBA) to all commercial bank of Pakistan so
that they charge interest to their customers on the basis. This rate is risk free rate
plus inflation plus risk premium.

History of KIBOR;

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 Year 2004
For the first time, KIBOR-related lending rates to corporate customers

Introduction of KIBOR

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).
Need of KIBOR
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. So SBP decided that there must be a standard system.

KIBOR Maturity/Tenor
Short Tenure
1 week or 2 week
1,3 or 6 month
Long tenure
1 Year or 3 Year

How to Calculate KIBOR?

Authorities responsible for calculation of KIBOR

PBA (Pakistan Banks Association)

FMA (Financial Markets Association)
SBP: (State Bank of Pakistan)
It gives rules and regulations.

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 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 after which SBP eliminates 4 Top
Quotes from Higher side and 4 bottom quotes from lower side and take the
Average of Quotations of in-between. Thats the KIBOR for the Day. Around 11
A.M every working day it is provided by SBP.

Basis of Quotation
Following is the basis which is selected by commercial bank in providing
KIBOR Quotation to SBP

Risk free rate

Inflation premium
Risk premium (liquidity, maturity & default etc.)

Reason for Increase/Decrease in KIBOR:

Increase in KIBOR
It will make all types of consumer and business loans more expensive.
Reduced liquidity that will further cut back on consumer demand resulting
in slowing economic growth.
Companies can't expand due to poor liquidity resulting in either lay of
worker to reduce cash outflow so they can minimize the requirement to
obtained loan as they are expensive
create a recession
high unemployment
Decrease In KIBOR
It will benefit industrialist as markup rate should be at the lowest to provide
some breathing space to the industrial Sector.
It will encourage small entrepreneur to enter into market as they can
obtained loan at lower rate from previous year
It will ensure availability of cheaper money to cash starved private sector
besides this it will also be encouraging for the potential foreign investors for
investment in Pakistan.
It will help companies with high debt levels on their balance sheet are
expected to gain significantly from interest rate decline.
It will bring more investment in economy resulting growth outlook of
industrial sector improved as they can increased construction activity

Effect of Decrease in KIBOR on Bank

it will rise pressure on spread of bank

decrease in KIBOR will affect earnings of the banks by % percentage its falls
 Effect of decrease can offset by heavy investment in Pakistan Investment
Bonds (PIBs), made during 2014 as well as higher non-interest income.
Moreover, banks are now less exposed to interest rates risk as they were
previously because rates on saving deposits are also linked with policy rate,
which will be revised down following rate cut.

Important terms in KIBOR

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
FLOOR
A bank shall not decrease rate than floor rate
CAP
A bank shall not increase rate than the cap rate

Factors that determine KIBOR;

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.

Other factors that determine KIBOR

Cost of deposits
Administration cost
Customer

Economic factors that influence KIBOR

Factors link with KIBOR
Interest rate (Direct Relationship)
Rate of inflation (Direct Relationship)
Purchase power (Inverse relationship)

Where KIBOR is Applicable Where Not?

Applicable Not applicable

All floating/fixed rate term loan
Term Finance Certificates (TFC)
Commercial paper
Overdraft/running finance
Export finance scheme
Consumer financing and SME
lending Overdrafts and running
finance facilities existing before Jan,
31, 2004
All term loans with agreements
executed before January 31, 2004

KIBOR Rate As on Dec 27 2016

KIBOR As On Dec 31

KIBOR
14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2016 2015 2014 2013 2012 2011