The Bangladesh Bank has issued a draft policy seeking comments from stakeholders for setting up an alternative reference rate for phasing out the London Inter-Bank Offered Rate (Libor) rate.
Globally, lenders, including banks and other financial institutions, use Libor as a benchmark reference for determining interest rates for various debt instruments, including trade financing.
The draft, issued via a notice last week, focused on short-term trade financing for which presently six-month Libor plus 3.50 per cent per annum can be applied.
Apart from Libor, the notice allowed a benchmark rate in the currency of financing with prescribed mark up for discounting or early payment of export bills.
The notice also relaxed six-month fixed tenure rules by allowing flexibility depending on the credit period for financing.
In absence of a forward-looking rate like 3-month, 6-month, the relative rate may be compounded in arrears to calculate the effective rate for the tenure of credit, the draft said.
It also allowed Islamic Shariah-based benchmark rate for Shariah-based finance.
The policy will be applicable for permissible import under supplier’s and buyers’ credit.
Accordingly, the respective benchmark rate may, in case of necessity for phasing out of Libor, be applied during the credit period as per mutual understanding with the concerned lenders.
In addition, banks shall refrain from arranging Libor-tag financing when the global discourse is published with regards to the deadline for its usability, the draft also included.
The circular has required banks to apply the benchmark rate at least six months or during prescribed time framework before cessation in the publication of Libor rate, for new arrangements of short-term permissible trade finance.
The Financial Conduct Authority of England will reportedly end Libor after 2021.
It is expected that from 2022 onwards, all new loans and LCs will be priced differently in addition to carrying out entire outstanding loans and LCs on a new reference rate.
