Bangladesh Bank (BB) has set the interest rate of short term trade financing at 3.5 per cent after changes in LIBOR (London Interbank Offered Rate).
BB’s Foreign Exchange Policy Department issued a circular in this regard on Monday.According to the BB circular, all the Authorised Dealer (AD) banks’ interest rate will be determined by adding 3.5 per cent to the new benchmark in the international market system and adding a 2.5 per cent annual risk premium.
The UK's Financial Conduct Authority is reported to end LIBOR after 2021. The Declaration of LIBOR will completely be phased out from July 2023.
It is expected that from 2022 onward, all new loans and LCs will be priced differently in addition to carrying out entire outstanding loans and LCs with switching LIBOR to the new reference rate.
The circular has focused on short term trade financing for which presently 6-month LIBOR + 3.5 per cent per annum can be applied.
The circular has allowed, besides LIBOR, reference/benchmark rate in the currency of financing with prescribed mark up for discounting/early payment of export bills.
In the case of risk-free benchmark rates, a risk premium of 2.5 per cent per annum on the markup rate of 3.5 per cent can be applied, according to the circular.The circular has relaxed six months fixed tenure by allowing flexibility depending on the credit period for financing.
In absence of a tenure-linked rate like 3-month or 6-month, the relative rate may be compounded in advance to calculate the effective benchmark rate for the specified tenure.
The circular has also allowed Islamic Shariah-based benchmark rate for Shariah-based finance.
The policy will be applicable for permissible usance import under supplier's/buyer's credit.
According to the circular, the respective benchmark rate may be applied during the credit period as per mutual understanding with the lenders concerned in case of necessity for phasing out of LIBOR.
In addition, AD banks shall refrain from arranging LIBOR-tag financing as and when global discourse is published with regards to the deadline for its usability.