Reference rates are interest or profit rate benchmarks used to determine lending or financing rates over the tenure of floating rate loans or financing facilities. The way these rates are determined and applied affects consumers repayments or payments, the pricing practices of financial service providers FSPs, and the effectiveness of monetary policy transmission.
The Reference Rate Framework RRF was introduced in January 2015 to replace the Base Lending Rate BLR with the Base Rate BR as the main benchmark for pricing new floating rate retail loans and financing facilities. Under this framework FSPs were allowed to set their own BR. While this provided greater flexibility in pricing, the methodologies used to determine BR became increasingly complex over time. This made it harder for consumers to compare loan or financing products across FSPs and to understand changes in their repayment or payment instalments. It also led to higher operational complexity and resource requirements to develop and maintain these methodologies. In addition differences in how BR was constructed resulted in uneven and weaker transmission of monetary policy to the benchmark cost of funds.
The revised framework under this policy document outlines an industry-wide, standardised benchmark rate to be used by all FSPs. This revised RRF is an outcome of Bank Negara Malaysia’s (the Bank) periodic review of its policies to ensure that the requirements remain relevant and fit-for-purpose in achieving the intended outcomes of the RRF, which are to-
(a) facilitate effective transmission of monetary policy decisions;
(b) promote a transparent reference rate that enables meaningful comparison of loans/financing products across FSPs to allow consumers to make
informed decisions; and
(c) reinforce sound and efficient practices in the pricing of floating-rate retail loans/financing facilities by FSPs.
As per the current practice, FSPs would retain the flexibility to determine the lending/financing rates on new loans/financing facilities based on FSPs’ internal and commercial considerations, subject to the Bank’s guidelines and policies.
This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking
