Effect of Kibor on Its Five Lags

Topics: Regression analysis, Central bank, Linear regression Pages: 14 (4682 words) Published: April 15, 2011
In this thesis it will be analyzed that due to increased demand in interest rate and transaction of money market is totally dependent on KIBOR rate, the certainty of KIBOR affecting its five lags will be evaluated. To conduct this study KIBOR time was considered an independent variable and 5 lags were considered dependable variable. By applying regression analysis, using backward method where the most insignificant variable is deleted one by another and finally results are produced, it was concluded that when regression was run using all variables together we found the model has strong relationship between dependent and independent variables. Secondly when we use regression analysis applying to individual variable separately it revealed that only variable Kibor t_1 and Kibor t_2 has significant relation with the dependent variable and all other has insignificant values. The KIBOR rate is given by National Bank of Pakistan on daily, weekly, monthly and on 1,2 and 3 yearly basis to all the commercial banks of Pakistan so that they charge interest to their customers on that basis. This rate is inflation adjusted rate and then banks by adding 2 or 3% in KIBOR rate charge their customers for their profit. Kibore =Karachi Interbank Offer Rate

1.1.2 Background of KIBOR
KIBOR means Karachi Interbank Offer Rate. The KIBOR was launched in 2001 and in 2004 its scope and operation was expanded. Since it has started, almost every bank of the country preferred to devise its own mechanism for determination of KIBOR and it evoked serious reaction from private sector. The SBP in consultation with the Pakistan Banks Association has introduced KIBOR as a reference rate for corporate lending to make interest rates more market-driven. Bankers say that treasury bills rates are no longer reflective of the market-based interest rates. Currently banks quote KIBOR-based rates for up to six months but they have assured the SBP of extending the tenure to one year by end of March and to three years by end of December this year.

The Habib Bank Ltd (HBL) has become the first commercial bank which has linked its Karachi Inter-Bank Offered Rate (KIBOR) related financing with State Bank of Pakistan (SBP) displayed rate of KIBOR. The SBP displays both bid and offer rates daily on its website. The trading in KIBOR Futures brings an innovation to the financial sector but it will take some time for key stake holders to fully benefit from it. The coming weeks and months will see the key market participants from financial sectors, corporate and the brokers catching up with the learning curve and actively begin to use KIBOR Futures for their business planning and risk management. Over the past two years numerous consultations were held by NCEL with SBP, SECP and FMAP for regulatory approval of KIBOR Futures.

1.1.3 Interbank Market
When are seeking funds for borrowing, consumers, financial speculators, and corporations contact a bank representative to discuss the terms of the proposed credit agreement. These discussions and transactions between clients and banks take place at the retail level, where banks charge a premium over the cost of the funds acquired in the wholesale market in order to make a profit. The interbank market is the name of the wholesale market where banks trade between themselves in order to remain liquid and meet customer demands for deposits, withdrawals, and borrowing for many different purposes. The main difference between the interbank market and the retail market (that is, the bank counter) is the interest rate charged on borrowed funds. Since commercial banks have access to the central bank of the nation, they are able to acquire funding at a much lower cost than what it available to the end-user. By passing the low-cost money acquired through the terms and conditions set and maintained by the central bank to the consumer at a higher price, banks can make a profit, and stay in business....

References: [1] Ma Siddiqui (2009) Statistical irrelevance of Kibor to the vitality of Pakistan.
[5] Initkhab A and Dr. R Salaria, Determinance and dynamics of Dividend policy: Evidence from Pakistan Banking Sector. JISR V-7, 2009.
[6] Green, W. H. (1997) Econometric Analysis, 3rd Edition, New Jersy.
[7] http//www brecordeor.com/index.php.
[12] E. Erraise and F. Mercurio, Yes, Libor Models can capture Interest Rate Derivation Skew: A simple modeling Approach (2005)
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