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State Bank asks banks to set a benchmark for lending to clients

KARACHI (November 29 2002) : The State Bank of Pakistan wants the banks to come up with a benchmark for lending as KIBOR has become more of a benchmark for transactions between banks rather than between banks and clients.

A meeting at the SBP Head Office, chaired by Deputy Governor (Banking) Taufiq Hussain with the heads of five big network banks on Thursday, took stock of the working of Karachi Inter-bank Offered Rate (KIBOR), which is linked to the liquidity in the system, thereby subject to more volatility, and is not being used for rate fixing with clients.

The SBP wants a more transparent lending mechanism in order to address complaints of arbitrary lending rate fixation based on personnel relationship rather than the logic of commercial consideration. The aim is to duplicate the LIBOR methodology in the UK or the prime rate in vogue in the US, and evolve a benchmark for customer lending.

At present, long term deals with floating rate are either linked to the treasury bill rate of the government or the discount rate of the SBP.

Another issue is the customers' lack of understanding by customer of KIBOR and how it works. KIBOR it appears to them is too fragmented and dependent on weekly auctions held by SBP, which so far determine the liquidity in the system. Even though KIBOR deals are quite transparent and clearly shown on the trading screen, they remain a function counter party limit fixed by a bank for other banks under corresponding arrangements.

The SBP wants the big banks to fix some kind of a prime rate and actual transaction between a bank and a client to take place on daily basis. At present, clients have to go to individual banks to get the best possible deal.

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