How does the interest rate market operate In Pakistan?

To understand the interest rate market and how it operates in Pakistan, we have to first
understand what the interest rate means.

Interest Rate:

A rate which is charged or paid for the use of money. An interest rate is often expressed
as an annual percentage of the principal. It is calculated by dividing the amount of
interest by the amount of principal. Interest rates often change as a result of inflation and
Federal Reserve policies. For example, if a lender (such as a bank) charges a customer RS
90 in a year on a loan of RS 1000, then the interest rate would be 90/1000 *100% = 9%.
The charged or paid for the use of money are different in long term and in short term.
Usually banks charge high interest rate in long terms debt as compare to short term.
These long and short term rates depend on the lender and borrowers on the bases of their
usage of money. But the lender is more concern while borrowing the money because he is
not sure whether he will get the amount back or not and taking the risk taker. So before
lending the money to any one, they will be an agreement between two parties i.e. between
borrower and lender, which will assign that for how long the money will be lent and for
how long period.

What is the Maturity of an Interest Rate Security?

One of the key features of any Interest Rate Security is its maturity. The maturity tells
you when you should expect to get your principal back and how long you can expect to
receive interest payments. (It is important to note that some interest rate securities issued
by corporate have "call", or redemption, features that can affect the date when you’re
principal is returned). Perpetual are securities without a maturity to date.

Factors that determine the price of an Interest Rate Security?

The price you pay for an Interest Rate Security is based on a variety of factors, such as
prevailing market interest rates, credit quality, economic market of the county, maturity
terms and tax status. Newly issued interest rate securities normally sell at or close to their
face value. Prices of interest rate securities traded in the secondary market, however,
fluctuate in response to changing interest rates. When the price of an interest rate security
increases above its face value, it is said to be selling at a premium. When an interest rate
security sells below face value, it is said to be selling at a discount.

After having the clear view of interest rate, we might be thinking that who plays vital role
in issuing the loans and how it all process works. In Pakistan, SBP(State Bank of
Pakistan) is the central bank of the country and it take all the majors step regarding
money. SBP can be act in many ways but regarding our project and subject we will
emphasis on few of the main features of SBP.

Some of the main features of SBP:

1
 Bankers' Bank

The Bank also functions as the bankers’ bank. Banks are classified as scheduled and
nonscheduled. The Bank maintains an updated list of all scheduled banks at its various
offices. These banks are entitled to certain facilities from the State Bank and in return
they have some obligations to it. State Bank provides the following three important
services to the scheduled banks.

a. It keeps the deposits of commercial banks, which primarily constitute the statutory
reserves of scheduled banks. Scheduled banks are required to keep with the State Bank
certain percentage of their demand and time liabilities. Normally, the statutory reserves
are kept with the Bank free of any return. However, the Bank can offer some interest on
certain fraction of these reserves. Scheduled banks also keep a certain amount of excess
reserves with the Bank, which not only facilitate inter-bank payments but also provide
buffer for statutory reserves in case of fluctuations in banks demand and time liabilities.

b. The State Bank also provides extensive remittances facilities to banks at confessionals
rate under the Remittance Facilities Scheme. This facility helps the flow of funds
smoothly and efficiently between various centers in the country. The Bank provides this
facility through the media of its own offices, the branches of National Bank of Pakistan
acting as its agents, and treasuries and sub-treasuries holding permanent currency chests
at places where the State Bank has no office. Telegraphic Transfers (T.T.), Mail Transfers
(M.T.), Demand Draft (D.D.) and Government Draft (G.D.) are the principal instruments
used for remittances.

c. In order to streamline payments through the financial system, the Bank also manages
the operations of clearing houses. In the five major cities, the functions of SBP clearing
house has been handed over to a private agency namely National Institutional Facilitation
Technologies Private Limited(NIFT) to the extent of sorting of payments instruments and
preparing clearing schedules. Presently NIFT covers 80 percent of clearing services.
However, the settlement of accounts is still undertaken at SBP.

Lender of the Last Resort

One of the important characteristics of a central bank is its being the lender of the last
resort. The State Bank provides loan and re-discount facilities to scheduled banks in
times of dire need when they find no other source of funds. These facilities are ordinarily
provided by the Bank against government securities, trade bills, agriculture bill, etc.
These loans are essentially short-term in nature and are advanced to enable the banks to
meet their temporary requirements of funds arising out of seasonal expansion in trade,
commerce, agricultural operations, and other economic activities.

Advisor to Government
The State Bank of Pakistan also acts as an advisor to the Government on financial and
economic matters particularly with reference to their monetary aspects. The bank
counsels the Government on loan operations and advises it with regard to the timings,
terms and conditions and rate of return on these loans. The advice is also tendered on
matters like agricultural credit, cooperative credit, industrial finance, exchange
regulations, banking and credit control, mobilization of savings,

2
Financial aspects of planning and development and similar other economic issues. State
Bank of Pakistan also tenders advice to the Government on debt management issues.

Monetary and Fiscal Policies Coordination Board (MFPCB)

The State Bank also participates in economic policy making as a member of various
government agencies and committees. In order to coordinate fiscal, monetary, foreign
trade and exchange rate policies. The Board is responsible for ensuring consistency
among macro targets and to determine, in consultation with the Federal Government, the
limits of credit to be extended to the Federal and Provincial governments and review, on a
quarterly basis, Government’s borrowings in relation to pre-determined or revised targets.
The Bank is required to place before the Board its assessment regarding the impact of
economic policies on monetary aggregates and recommendations for fixing the safe
limits of monetary expansion and Government borrowings. In carrying out its assigned
functions of coordinating fiscal, monetary and exchange rate policies and for ensuring
consistency among macroeconomic targets of growth, inflation, fiscal, monetary and
external accounts, the Coordination Board shall not take any measure that would
adversely affect the autonomy of the State Bank of Pakistan as provided in the SBP Act.

Inflation and interest rate:

Central Banks around the world tend to focus on core inflation that excludes the impact
of food and energy prices. Core inflation basically represents policy-induced inflation, be
it fiscal, monetary or exchange rate. The persistence of relatively high core inflation
compelled the State Bank of Pakistan (SBP) to change its monetary policy stance from
‘accommodative’ to ‘neutral’ to aggressive tightening.

Money supply theory suggests that central banks can influence the rate of inflation by
changing the rate of growth of the money supply through monetary policy instruments.
An increase in interest rates, in turn, reduces demand for housing, consumer durables and
investment goods and in principle, brings down inflation. The converse should have the
opposite effect. The real world, however, is more complicated. The velocity of money, for
example, tends to vary in ways that are not always easy to explain. Also, the money stock
is not always amenable to central bank control, in particular, for an open economy.

To overcome the shortcomings of monetary targeting, starting in the late 1980s, many
countries with flexible exchange rates initially industrial, and later, emerging market
countries began to adopt inflation targeting. Today, more than 40 countries aim at
achieving low and stable inflation, but only 18 of them are classified as fully-fledged
inflation targets with clear and credible commitments to an inflation target.

The influence of interest on prices is not immediate as it acts via a complex transmission
mechanism (i.e. a convoluted pipeline of economic variables), so that time elapses
between the implementation of monetary policy and its expression in the price level.

Monetary policy must take the lag in its effect into account, i.e. it must anticipate the
trend of inflation in the future and act appropriately in the present. In other words, it must
take the lead in attaining the target, not simply react to actual inflation.

As per SBP, the impact of its monetary policy measures since 2005 has proved to be
robust in containing inflation and that there is a clear need to continue the tight monetary
3
policy in view of persisting pressure on core inflation. SBP will continue to monitor
inflationary pressures and if needed, may consider further tightening of the monetary
policy to achieve price stability and ensure continued sustainable economic growth.

To reduce inflationary pressures in the economy what SBP wants do is to change key
interest rates including a further rise in the discount rate. The SBP increased the discount
rate by 150 basis points in April 2005 to 9.0 percent and as a result of this increase
weighted average lending rate has also increased from 6.78 per cent in April 2005 to 9.53
per cent in December 2005 - a rise of 275 basis points. Any further increase in the lending
rate will also increase the cost of capital, thus pushing further inflationary pressures in the
economy. This may also lead to default in consumer and other loans as they are on
floating rate basis. The SBP will have to ensure easy credit to consumers and investors.
At the same time it will have to ensure that inflation does not rise further due to its tight
monetary policy.

The main player that affect the intrest rate market

KIBOR (Karachi inter-bank offered rate).

KIBOR as a reference rate had been finalized by a group of senior bankers. Initially
KIBOR of one-month; three-month and six-month would be used as a benchmark for all
corporate lending in the local currency. The banks had agreed on extending the KIBOR
tenures to one year by March 31, 2004 and then to three years by December 31, 2004 for
using it to price corporate loans of similar tenures.

"The main purpose of this plan is to introduce some uniformity in corporate lending
rates".

Suggestions:

• First, we believe that business is primarily the domain of private individuals and
groups. Thus we have to significantly expand the space available to the private
sector in running the economy of the country.

• Second, the role of the government is that of a regulator and umpire. It must not
engage in any economic activity directly. It is not the business of the government
to engage in business.

• Third, markets should be left alone to determine price and output decisions.
Interventions are justified only in the case of market failure or when the
vulnerable groups of the society are being affected by major swings in market
conditions.

• Fourth, external trade would be the main engine of growth, particularly in the
emerging world trade regime exemplified by the WTO. Accordingly, our industry
has to reorient to be competitive in the world market.

4
 • Fifth, Pakistan would move toward greater openness and integration with the
world markets and as such foreign investment will not only be provided a level
playing field but would be given the necessary guarantees for its protection.

• Sixth, poverty is a major challenge our society is facing. The government not only
has to play an active role in combating this problem, but the entire focus of
economic planning would be redirected toward poverty alleviation. However, we
believe that growth will be the primary instrument to achieve this goal.

• Finally, let me add the dimension of governance, which no one has addressed in
the past. Besides devolution, reforms in civil services, tax administration,
judiciary and police are all aimed at reconstructing the nearly demolished
institutions of governance so that the state regains its efficiency and capacity to
positively influence the lives of its citizens.

The following banks which we have selected for our project are:

 Bank Al-Falah
 United Bank Limited
 National Bank of Pakistan
 Prime commercial Bank Limited

Bank Al-Falah

Bank Alfalah Limited was incorporated on June 21st, 1997 as a public limited company
under the Companies Ordinance 1984. Its banking operations commenced from
November 1st ,1997. The bank is engaged in commercial banking and related services
as defined in the Banking companies ordinance, 1962. The Bank is currently operating
through 104 branches in 36 cities.

Chairman’s Messeage

“Our core philosophy of honesty, transparency in customer dealing, product innovation,

excellence in customer service and our commitment to being as responsible corporate
citizen .”

Interest rates of last 5yrs:

2000/2001 2002 2003 2004 2005

9.5%(same in 9.5% 9.5%(cars) 9.5%(cars) 12.9% till june
both yrs) no HF no HF 8.5% (revised) 12.5%(HF)

5
The following interest rate charge on leasing

1) House financing
2) Auto financing
3) Loan

House financing:
House financing is a policy offered by bank- al falah in year 2004.Its
a short term loan only for building new houses , renovations etc.

The mark up charge on house financing is 12.5% and its duration is only one yr. They do
not offer more than 1 yr.

Car financing:
Cars have become necessities these days and people want to have their
own car that is why bank offers car leasing facility and they charge 12.5% for 3 yrs and
14.5 % for 5 yrs. They cannot lease the cars without insurance so they give the insurance
facility. It varies from 4.25%, 4.50% and 5.0% on actual car price. The down payment of
car leasing is 10% that is fixed for any brand of car.

Installment Calculator

Through this calculator we can calculate the car financing and we

have taken this calculator from bank alfalah’s site (www.bankalfalah.com)

6
Car Price Rs
Minimum Down Payment Rs
Down Payment Rs OR %
Financing Period
Mode of Payment
Insurance
Loan amount
Your Monthly installment without Insurance is : 6,230 Rs

Complete Installment Plan with Insurance

Car Name : SUZUKI MEHRAN VX Non-Metalic

Total Price : 315,000
Down Payment : 31,500
Alfalah's Participation : 283,500
Tenure : 5 Year
Insurance Plan : Insurance @ 4.25 %
Markup : 11.9%
Installment : 6,230 Rs

Down Payment 31,500

Processing Charges 4,000
Advanced First Month
7,234
installment
First Years Insurance Premium 13,388
Registration charges 0
Total Payable 56,122

7
 Year Number of Installment Insurance Net payable
Number Installments In Rupees In Rupees In Rupees

1 11 6,230 1,004 7,234

2 12 6,230 904 7,134

3 12 6,230 813 7,043

4 12 6,230 732 6,962

5 12 6,230 0 6,230

Extra information
Mark up charge for all customers and account holders of bank alfalah are same. They are
charging mark up for ALTO.CULTUS AND LIANA is 12% for 3yes and 14% for 5 yrs.

United Bank Limited

UBL has assets of over Rs. 300 billion and a solid track record of fourty six years - in
addition to the convenience of over 1000 branches serving you throughout the country
and also at several overseas locations.

United Bank Limited is one of the largest commercial bank in the country. With almost
forty six years of good standing to its valued clients, it has stood the test of time,
producing assets of over Rs. 300 billion.

We offer our services through a wide network of over 1000 domestic branches ll over
Pakistan and 15 verseas branches s part of global network.

The following interest rate charge on leasing

 UBL drive
 UBL address
 UBL personal loan

UBL drive

UBL Drive is a unique auto financing product which offers you features, options and
flexibility unmatched by any other bank, because at UBL, You come first.

They deal in new cars and used cars and you can make your installments by yourself.

They do charge markup on cars:

8
 3yrs ------------- 12.5%

5yrs-------------- 12.9%

7yrs--------------13.5%

UBL address:

You have always dreamt of having a permanent address. Now you can turn your dreams
into reality with UBL Address - the unique offering that makes you the owner of your
home while remaining within your limited income.

They charge fixed rate on 20yrs and they are charging different rates according to the
duration of loan.

5yrs------------11.25%

7yrs------------13.60%

9yrs------------14.50%

UBL personal loan

Personal loans mean loans for small businesses etc

3yrs------------9.5%

5yrs------------11.55%

7yrs-------------13.45%

National Bank of Pakistan:

National Bank of Pakistan maintains its position as Pakistan's premier bank determined to
set higher standards of achievements. It is the major business partner for the Government
of Pakistan with special emphasis on fostering Pakistan's economic growth through
aggressive and balanced lending policies, technologically oriented products and services
offered through its large network of branches locally, internationally and representative
offices.

Overseas Branches Domestic Branches

9
 16 Overseas Branches 29 Regional Offices
4 Representative Offices 1,189 Branches
1 Subsidiary 130 Online Branches
1 Joint Venture 4 Subsidiaries

 NBP home finance

National Bank of Pakistan (NBP) has

announced the launch of a housing
scheme to cover all sections of the society
with monthly income starting from as low
as Rs. 5000/- per month*. *(Conditions
apply)

Branded as 'NBP Saibaan' (Housing for

all), the scheme offers a maximum loan of
Rs 10 million in accordance with the debt
burden criterion. Loans are available for
Home Construction, Home Purchase and
Home Improvement. For Home
Improvement Loans the maximum amount
is Rs. 2.00 Million.

Home Construction and Home Purchase

loans can be repaid over a period of 20
years, whereas the repayment period for
Home Improvement loan is 15 years.

Prime Commercial Bank limited:

10
Prime Bank is the vision of a group of Pakistani professionals with extensive domestic
and international banking and finance experience. Prime Bank came into existence on
September 30, 1991 with presence in all the stock exchanges of the Pakistan. Some of the
foreign investors belong to a highly regarded, very sizeable and well-diversified business
group of Saudi Arabia

During the initial years, Prime Bank’s strategy was focused on continuing improvement
of internal procedures and operating structures, to ensure a greater control over the
quality of its operations. After initial consolidation Bank has and continues to focus on
expansion, through catering the needs of different segments of the country and by
extending its branch network.

Commercial Banking activities were initiated at the time of inception. During 1993, two
more business divisions i.e. Corporate Banking and Financial Services were added. By
1996, Prime Bank’s countrywide network of seventeen Branches was in place. Under the
Bank’s on going branch expansion program thirty-two new branches have been added
during the years 2001, 2002, 2003 and 2004 while thirteen more branches were opened
during 2005. This raised the total number of branches to sixty-two focusing primarily on
the middle market commercial banking segment, consumer banking initiatives as well as
agricultural, housing, financing of small and medium sized enterprise and Islamic
banking.

Total Assets of Prime Bank during the period from December 1992 to December 2005
have grown at an annual compound rate of about 23 percent to Rs. 53.8 billion. Within
this period, Shareholders’ Equity grew from Rs.371 million to Rs. 3.4 billion, Deposits to
Rs. 38.9 billion and Advances (net) to Rs. 25.5 billion. Profit before tax grew from Rs.
40.6 million to Rs. 765 million for the year ended 31st December 2005.

After fourteen years of well controlled, yet sure and successful operations, the Bank is
now poised to move forward rapidly to be at the cutting edge of financial services
combining highly efficient delivery systems with continuous product innovation.
Therefore, development of superior Human Skills and the latest Information Technology
platform are the cornerstones of Prime Bank’s overall strategy to be in the exclusive club
of winning banks of the future.

Branch network:

A growing nationwide network of 63 branches.

11
Features:

• Financing from 300,000/- upto 40,000,000/-

• Markup as low as 12.50%
• Balance Transfer Facility (BTF) available as low as 11.50
%
• Tenure from 3 years to 20years

Markup Rates
SBP Discount rate
Base Rate
+1%
Home Purchase /
12.50%
Renovation
Home Construction 15.00%

Features:

• Financing from Rs 10,000/- to Rs 500,000/-

• No down payment
• No processing charges
• No hidden cost
• No insurance cost
• Free doorstep delivery
• Quick approval
• Monthly installment as per your convenience (12, 18, 24 & 36 months)
• 5% BONUS on timely payment. (For LG Products only)*

12