Pakistan- Economy in 2009

.Challenges- Persistent Inflationary

Pressures

.Events to watch out in Year 2009

.Political uncertainty looming

large

KIBOR

“KIBOR is the average interest rate at which banks want to lend money to other banks”

KIBOR as a benchmark

. To encourage transparency

. Promote consistency in market based pricing

. Improve management of the market risk undertaken by banks.

Cont….

The banks do lending and borrowing taking KIBOR as benchmark with additional margin on it, which depends on

. The tenure of the deal

. The liquidity level

. The credit quality

Financial Markets Association of Pakistan (FMA)

. It was formed in 1997,

. It is a Non-commercial, Non-profit,

Self-financed and Professional Association of Dealers of Financial Instruments

Role of Financial MarketsAssociation of Pakistan

. Select the members of the KIBOR Club

. Update KIBOR on Reuters

. Confirm the authenticity

Steps taken by FMA and SBP to streamline KIBOR

. Banks which fail to submit KIBOR rates

would be suspended

. SBP will investigate complaints by

KIBOR contributor banks

. SBP will monitor the quotes among

the KIBOR contributor banks

Pakistan Banks’ Association (PBA)

. Established in 1953, its main objective is to coordinate the efforts of the

banking industry

. Its controlling body is the Executive

Committee

. Executive Committee tenure is 1 year

LONDON INTERBANK OFFERED RATE

“"The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time." “

LIBOR

. Why LIBOR is Important

. LIBOR rates are widely used as a reference rate for financial instruments

. Calculation of LIBOR

LIBOR

LIBOR based derivatives:

. Eurodollar contracts

. Interest rate swaps

Is LIBOR reliable during Financial Crisis?

Reuters

. UK based Company

. Provides information around

the world

. Major competitors

Bloomberg L.P Dow Jones Newswires

Reuters-History

. Founded by Paul Julius Reuter

. In 1865, Reuter's private firm

was restructured

. Operates in 200 cities in 94

countries

. Reuters was floated as a public

company in 1984 on the London Stock

Exchange and on NASDAQ

Linkages between Reuters

. Co-operation between

international and national agencies required

. Three major agencies

French Havas, German Wolff British Reuters .

cont…News agency correspondents mustknow

. Domestic news that is interesting for

their national media

. Foreign news that serves their

national clients' needs.

. National and international news

Reuters correspondents are mainly responsible for the latter two tasks

Linkage between Reuters and KIBOR

.KIBOR flashed on Reuters on

September 7,2001

.Reuters has helped our market come a long way

.Primary and Secondary rates maintained by SBP

But KIBOR only disseminated on Reuters network

Application of KIBOR

KIBOR is applicable on:

.Term Finance Certificates (TFC’s)

.Commercial Papers (CP’s)

.Over Drafts and Running Finance

Application of KIBOR

KIBOR is not applicable on:

.Export Finance Schemes (EFS)

.Small Medium Enterprise Lending's (SME)

.OD’s and Running Finance prior to January 31,

2004

.TFC’s and CP’s prior to January 31, 2004

.All time loans sanctioned before January 31,

2004

Substitutes of KIBOR

. Gold/ Silver

. Oil prices

.

Factors linked with KIBOR

. Interest rate

. Rate of Inflation

. Purchase Power

. Discount Rate

. Balance of Payments

.

KIBOR- Highlights of 2008

. BANKS ASKED TO TRIM KIBOR

RATE: SBP had already warned the commercial banks to reduce the widening gap between the discount rate and banks’ average ask offer rates to the borrowers

. Federation of Pakistan Chambers of

Commerce and Industry (FPCCI) concern over the tight Monetary Policy: SBP has been using tight monetary policy to control inflation. Increase in discount

rate by 100 basis points has affected industry.

.

KIBOR- Recent Shifts in 2009

.SBP MAY SCALE DOWN INTEREST RATE IN

COMING MONETARY POLICY: The discount rate for the banks and rate applicable to the borrowers was declining over the last few months. Resultantly, (KIBOR), had recorded

decline.

KIBOR- Recent Shifts in 2009

SBP MAY SCALE DOWN INTERESTRATE IN COMING MONETARY POLICY (CONTD..)

SBP would establish an ‘interest corridor’: which means SBP has hinted at the possibility of further reducing interest rates in the upcoming review of monetary policy keeping in view the decline in the KIBOR.

The interest rates would be lowered before June considering the

ease in inflationary pressure.

Spreads: Difference between the (1) buyer's price (bid) and the seller's price (offer) which increases or decreases in step with the demand and supply of the security, (2) return (yield) from securities of the same rating (such as treasury bonds) but of different maturity periods, or (3) return from the securities of the same maturity periods but different ratings.

KIBOR- Recent Shifts in 2009 (contd..)

BANKS CONCENTRATING MORE ON PERSONAL LOANS

It has been found that banks provide loans to the industrial and commercial enterprises on the basis of 6 to 12-month KIBOR plus 2.5% depending on the credit worthiness of the enterprise.

The interest rates are declining and the liquidity position of the banks is improving they are concentrating more on personal loans.

6 MONTH KIBOR DOWN TO 14.50%

KIBOR variance.doc

Launch of Kibor Futures

. Significant milestone has been achieved by the

listing of Kibor Futures Contracts on National Commodity Exchange Limited (NCEL).

.Interest rate risk is omnipresentDepending on the nature

of business, a FI may or may not be exposed to currency fluctuations, commodity price volatility or equity market risk but it will always be

affected by interest rate movements.

Launch of Kibor Futures (contd..)

Benefits:

. value of all future cash flows is affected by the changing levels of interest rates, it is logical to expect that most entities, given the opportunity, will make use of available hedging instruments.

.If a bank is able to better hedge its assets and liabilities by using the futures market, it will reduce the need to keep a huge interest spread without impacting the bank’s profitability.

Launch of Kibor Futures (contd..)

Benefits:

. Kibor futures will allow banks to perform their lending function efficiently by taking the burden of interest rate risk away from the corporate and industrial sector.

MAIN SERVICES ANDPRODUCTS OF REUTERS IN:

.Exchange Traded Instruments

.Commodities & Energy

. Fixed Income

. Hedge Funds

. Risk Management

3-month kibor.doc