STAR BUSINESS REPORT

Banks will be borrowing and lending among themselves for the short-term, using a new transaction-based reference rate from Wednesday.

At a press conference at its headquarters in Dhaka yesterday, the Bangladesh Bank (BB) announced the shift away from the long-standing practice of relying on quoted rates under the Dhaka Interbank Offered Rate (DIBOR).

Instead of simply using the rates banks said they would charge, the new framework draws on actual transactions to determine borrowing costs.

The new system is meant for improving transparency and efficiency in the money market. It also brings Bangladesh into line with global benchmarks such as the Secured Overnight Financing Rate (SOFR), published daily by the New York Fed and widely used in international markets.

Similarly, the BB will publish the new reference rates regularly on its website from Wednesday.

DIBOR, introduced in 2010, was based on rates banks reported for lending to one another. Over time, however, the system showed its weaknesses. Many commercial lenders did not provide data consistently, meaning the rate often failed to reflect real market conditions.

Under the new automated system, the BB will rely on actual interbank transactions and two new benchmark rates -- the Bangladesh Overnight Financing Rate (BOFR), and the Dhaka Overnight Money Market Rate (DOMMR).

BOFR is a secured, or risk-free, rate derived from interbank repo transactions. In a repo deal, one bank sells government securities to another with an agreement to buy them back later at a slightly higher price. The securities act as collateral, reducing the risk for the lender.

DOMMR, by contrast, is based on unsecured call money transactions. In this market, banks lend to one another for very short periods without providing collateral, relying instead on mutual trust and liquidity needs.

BOFR will be available for overnight and one-week tenors. DOMMR will cover overnight, one-week, one-month and three-month tenors.