KIBOR (Karachi Interbank Offered Rate)

KIBOR, the Karachi Interbank Offered Rate, is the main benchmark interest rate for lending in Pakistani rupees (PKR). It is a daily average of the rates at which a panel of major banks say they are willing to lend unsecured funds to other banks for set periods, from one week to one year. Most corporate loans, many consumer and housing loans, and a large part of government-linked financing in Pakistan are priced as KIBOR plus a margin.

KIBOR was introduced in September 2001 as a reference for the interbank market, and from February 2004 the State Bank of Pakistan (SBP) and the Pakistan Banks' Association made it the benchmark for rupee corporate lending. It plays the role that LIBOR once played for dollar and sterling loans. Unlike LIBOR, which was replaced by overnight rates such as SOFR, KIBOR remains in daily use.

Suppose you want to know the going price of a used car, so you ask twenty dealers what they would charge, throw out the most expensive and the cheapest quotes, and average the rest. That average becomes the reference everyone in town uses when they write a sales contract.

KIBOR does the same for money. Each morning a group of banks state what they would charge another bank to borrow rupees for a week, a month, three months and so on. The extremes are dropped, the rest averaged, and the result is published. A business that borrows at "3-month KIBOR plus 2%" pays whatever that day's average is, plus two percentage points, reset at agreed intervals.

A panel of around 20 banks submits bid and offer quotes each business day, and the published offer rate for each tenor is a trimmed average, with the highest and lowest quotes removed. The rates are published late in the morning and distributed through market data services, with the Financial Markets Association of Pakistan named in SBP instructions as the fallback publisher. Tenors have included 1 week, 2 weeks, 1 month, 3 months, 6 months, 9 months and 1 year, though the 3-month and 6-month rates are by far the most used for loan pricing.

Because KIBOR is based on quotes rather than actual trades, it shares a weakness of the old LIBOR: the published rate reflects what banks say they would charge. In practice it tracks the cut-off yields on Market Treasury Bills (MTBs) closely, since banks can always buy bills instead of lending to each other.

KIBOR follows the SBP's monetary policy. The SBP sets a policy rate and an interest rate corridor, with its overnight reverse repo as the ceiling and its repo facility as the floor, and uses open market operations (OMOs) to keep overnight rates near the target. Term KIBOR rates then reflect where banks expect the policy rate to go over the coming months:

• When markets expect rate cuts, 6-month and 12-month KIBOR tend to sit below the policy rate.
• When markets expect increases, longer tenors trade above it.
• In periods of tight liquidity, short tenors rise towards the ceiling of the corridor, as does the call money rate.

This is how a change in the policy rate reaches borrowers. A company with a loan priced at 6-month KIBOR plus 1.5% sees its rate reset at the next reset date, so an SBP decision feeds into business and consumer borrowing costs within months.

• Corporate and consumer loans. Term finance, running finance, car loans and many mortgages from Pakistani banks are priced at KIBOR plus a spread reflecting the borrower's credit risk.
• Government-linked financing. Bank lending to public agencies, such as commodity operations financing for wheat procurement and loans to state enterprises, is commonly priced off KIBOR.
• Debt securities. Floating-rate corporate bonds and term finance certificates pay KIBOR plus a margin, while floating-rate Pakistan Investment Bonds (PIBs) use the 6-month MTB yield instead.
• Derivatives. Interest rate swaps in rupees exchange fixed payments for KIBOR-linked ones.

Many Islamic banks in Pakistan also price their financing off KIBOR, for example by setting Murabaha or Ijarah profit rates with reference to it. Critics argue that using an interest benchmark undermines the distinction from conventional lending and its prohibition of riba. Supporters reply that the benchmark only measures the market cost of funds and does not change the structure of the contract. The SBP has allowed Islamic banks to use benchmarks other than KIBOR for participatory modes such as Musharaka and Mudaraba.

• State Bank of Pakistan