BB migrates to SOFR from LIBOR

The Bangladesh Bank has migrated to SOFR (Secured Overnight Financing Rate), the new reference rate that replaced LIBOR (London Inter-bank Offered Rate) from now on.

“Given the global market trends, it has been decided to set an all-in-cost ceiling per annum at SOFR + 3.50 per cent for short term trade finance in foreign exchange,” it said in a circular on Wednesday.

The central bank took the decision in aligning its systems and processes to embrace alternative reference rates as many central banks in the world started to use SOFR to reduce dependency on LIBOR.

The LIBOR is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans. It will be, however, phased out by June 30, 2023, due to a rate-setting scandal, which came to light in 2012.

On August 16, the central bank lowered the interest rate for short-term investment in foreign currency by 50 basis points, allowing banks to offer a maximum interest rate of LIBOR plus 3 percent instead of 3.5 percent, allowing the exporters, those from the garment sector, in particular, to borrow money from banks at lower interest rates.

Exporters welcomed the central bank’s decision saying that the new benchmark will help them borrow foreign currency and open letter of credit (LC) using Usance Payable at Sight (UPAS).

Bangladesh Knitwear Manufacturers and Exporters Association Executive President Mohammad Hatem told The Business Post, “The decision will help us open UPAS LC and receive short term foreign loans.”

UPAS LC happens when the exporter or beneficiary wants immediate payment for his goods where the applicant may not have the facility with his bank to issue sight LC’s.

Under the LC, the exporter will get the payment at sight if the documents are credit compliant. The importer will be charged interest, acceptance commission and other charges as per the terms of LC for using the LC.

On the other hand, if the applicant provides usance LC and the beneficiary will arrange to get the bill paid immediately from his bank, it is called discounting. Usually, the discount fee and interest will be charged against the account of the beneficiary.

The term ‘all-in-cost’ is the maximum cost that the borrower is allowed to incur on the external commercial borrowings and it includes the rate of interest, guarantee fees, other fees, expenses, charges etc but does not include commitment fee, pre-payment charges, and withholding tax.

SOFR is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the LIBOR. It is an influential interest rate that banks use to price USD-denominated derivatives and loans.

SOFR is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets.