In the wake of changes in London Interbank Offered Rate (Libor), the Foreign Exchange Policy Department of Bangladesh Bank (BB) on Monday issued a circular setting interest rate for short-term trade financing.
The interest rate will be determined by adding 3.5% to the new benchmark in the international market system and adding a 2.5% annual risk premium, according to the circular signed by Md Shahidul Islam, the department's general manager.
The UK's Financial Conduct Authority will conclude Libor after 2021, with the declaration of Libor phasing out from July 2023.
Hence, from 2022 onwards, all new loans and LCs will be priced differently, with outstanding loans and LCs to be carried out by switching Libor to the new reference rate.
Apart from Libor, reference/benchmark rate in the currency of financing with prescribed mark up for discounting/early payment of export bills has been allowed.
Meanwhile, in risk-free benchmark rates, a risk premium of 2.5% per annum on the markup rate of 3.5% can be applied.
Additionally, relaxation on six months of fixed tenure- allowing flexibility depending on the credit period for financing- has been issued. The relative rate may be compounded in advance to calculate the effective benchmark rate for the specified tenure in the absence of tenure-linked rates like 3-month or 6-month.
BB has also allowed the Islamic Shariah-based benchmark rate for Shariah-based finance to be applicable for permissible usance import under supplier's/buyer's credit.
In the case of import finance, where a forward-looking benchmark rate with tenure-link is absent, the relative rate applied as a benchmark rate for import finance may be compounded in arrears to calculate effective interest for the tenure of credit.
Authorized dealers may use the individual benchmark rate during the credit period, as per mutual understanding with the lenders concerned about the necessity for phasing out of Libor.
The circular also imposed restrictions on AD banks from arranging Libor-tag financing as and when global discourse is published regarding the deadline for its usability.
