Base Lending Rate (BLR)
Base Lending Rate (BLR) is a minimum interest rate calculated by financial institutions based on a formula which takes into account the institutions cost of funds and other administrative costs. The BLR is almost always the same amongst major banks. Adjustments to the BLR are made by banks at the almost same time; although, the BLR does not adjust on any regular basis. The BLR is usually adjusted at the time in correlation to the adjustments of the Overnight Policy Rate (OPR) which is determine by Bank Negara Malaysia (BNM) during Monetary Policy Meeting. Banks in some countries use the name "Prime Rate" or "Prime Lending Rate" to refer to their Base Lending Rate. On 1 November 1995, Bank Negara Malaysia (”BNM”) imposed a ceiling on the BLRs quoted by banking institutions. The ceiling rate would be determined by a formula. This framework was further revised on 1 September 1998 to enhance the speed of transmission of changes in BNM’s monetary policy (via revisions to intervention rate and SSR) to changes in the economy’s interest rate levels.
In general, the formula for the ceiling BLR is calculated as follows:
Ceiling BLR = Adjusted BNM Intervention Rate + Fixed administrative charge
The ceiling BLRs for commercial banks and finance companies are fundamentally different due to the way the Adjusted BNM Intervention Rate is interpreted:
For commercial banks, the Adjusted BNM Intervention Rate = BNM Intervention Rate x 80% / (1-SRR%)
For finance companies, the Adjusted BNM Intervention Rate = BNM Intervention Rate / (1-SRR%)
Commercial banks have a lower Adjusted BNM Intervention Rate (compared to finance companies) resulting in lower ceiling BLR as commercial banks have a relatively lower cost of funds. This is due to the presence of zero-interest current account balances.
In practice, the BNM Intervention Rate is taken as the prevailing BNM 3-month intervention rate (the previous month’s average KLIBOR was formerly used). BNM set the fixed administrative charge at 2.50% initially, but on 1 September 2008 lowered it to 2.25% in order to promote greater operational efficiency among banking institutions. Whenever BNM changes the intervention rate or the SRR, banking institutions are given 1 week to adjust their BLR to comply with the new ceiling.
SIBOR
SIBOR stands for Singapore Interbank Offered Rate and is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the Singapore wholesale money market (or interbank market). It is similar to the widely used LIBOR (London Interbank Offered Rate), and Euribor (Euro Interbank Offered Rate). Using SIBOR is more common in the Asian region and set by the Association of Banks in Singapore (ABS).
Reference rate
A reference rate is a rate that determines pay-offs in a financial contract and that is outside the control of the parties to the contract. It is often some form of LIBOR rate, but it can take many forms, such as a consumer price index, a house price index or an unemployment rate. Parties to the contract choose a reference rate that neither party has power to manipulate.
Prime Lending rate
The prime lending rate is the interest rate that banks charge their best clients to lend them money. These clients are usually established business people with excellent credit and a long history of successful transactions with the bank. As a result, this is the lowest interest rate a bank charges at any given time. The prime lending rate fluctuates in relation to the fed funds rate from the Federal Reserve Bank.
