BWBB3023 A191 Assignment 2 (loan pricing policy) (25 MARKS)

a) i) Describe TWO (2) methods used to compute the cost of fund in Base Rate (BR).

3 month Kuala Lumpur Interbank Offered Rate (KLIBOR)

- KLIBOR is the avarege interest rate at which term deposit are offered between prime bank in
the wholesale money market or interbank market.The first 3-Month KLIBOR is fixed on the
business day immediately before the first loan disbursement date. The next 3 months interest
rate is sets by adopting the 3-month KLIBOR rate which is fixed on the last business day of
the 3 months period. This is for small bank

Composite Funding
- Conposite funding invole in custimer deposit and instituitional deposit(wholesale). It also
have large non-interest bearibg account which is current account such as Maybank. Cost of
fund will refelected by change in interest rate expenses. This is for large bank.

ii) A change in Overnight Policy Rate (OPR) results in the change of BR. Which method
used in computing the cost of fund in BR that will cause an immediate change in the
loan interest rate and the deposit rate? Explain.

3-Month KLIBOR
- When OPR increase, deposit rate will increase, loan rate also increase. So, it will cause
the Base Rate (BR) increase. As BR is driven by market forces, when there is vlatility
of market rate the risk transmitted to borrower. BNM will mitigate this volatility
through market intervention to manage liquidity in the market. Hence, when BNM
increase OPR, it is luquidity and decrease inflation

b) i) Explain the difference between Base Lending Rate (BLR) and Base Rate (BR).

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 ii) Give TWO (2) benefits of a fixed rate loan.
Two benefits of a fixed rate loan is that the borrower will always know exactly how
much of a payment is due each period. Another benefit is the borrower payments
being the fix schedule which is in every month.

Two benefits of a fixed rate loan is that the borrower will always know exactly how much
of a payment is due each period. Another benefit is the borrower payments being the fix
schedule which is in every month.

c) The following table shows the base rate and base lending rate and effective lending rate of
three banks.

No. Financial Institution Base Rate (%) Base Indicative Effective

Lending Lending Rate* (%)
Rate (%)
4.10 6.96 4.65
1 Affin Bank
4.07 6.92 4.61
2. Alliance Bank
4.10 6.95 4.75
3 AmBank

i) Comment on the cost of funds between Affin Bank and Alliance Bank

Affin Bank has a BR of 4.10% while Alliance Bank is 4.07%. The higher the base
rate the stronger the cost of fund. Therefore, the cost of fund of Affin Bank is
stronger compared to Alliance Bank based on their base rate.

ii) Comment on the spread/margin between Affin Bank and Ambank in the effective
lending rate.

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