Bangladesh Bank is set to introduce a major structural shift in the country’s money market, moving away from a declaration-based interest rate system to one grounded in actual interbank transactions.
The central bank said the existing benchmark, based on banks’ quoted lending rates, has often failed to reflect real market conditions. To address this limitation, it will introduce new reference interest rates derived directly from executed transactions.
The move aims to establish a reliable benchmark that reflects the rate at which funds are actually traded in the market, rather than estimates or offers. Bangladesh Bank believes this will improve transparency, credibility and efficiency in interest rate determination.
At a press briefing held at its headquarters on Monday, the central bank’s Debt Management Department said two money market reference rates will be published daily from April 15: the Bangladesh Overnight Financing Rate (BOFR) and the Dhaka Overnight Money Market Rate (DOMMR).
Once published each morning, these rates will provide banks, financial institutions and investors with a dependable benchmark at the start of the day. This will make pricing of loans, bonds and derivatives more realistic and market-based.
A derivative is a financial contract whose value depends on the movement of interest rates or other underlying assets, and is widely used for risk management and investment purposes.
Bangladesh Bank expects the initiative to enhance transparency in the money market, align the system with global standards and deepen financial market development.
The most significant shift, officials say, is that interest rate signals will no longer be based on declared estimates but on actual transactions.
Why the change
Currently, Bangladesh uses the Dhaka Interbank Offered Rate (DIBOR), introduced in 2010, as a reference rate. However, DIBOR is based on rates quoted by banks rather than actual transactions.
In practice, banks report the rates at which they are willing to lend, and an average of those submissions is published as DIBOR. This often diverges from the rates at which funds are actually traded in the market.
The central bank noted that many banks do not regularly submit data, resulting in a rate that does not fully represent market conditions and may at times be misleading.
As a result, DIBOR is widely seen as an estimate-based benchmark, prompting the shift to a transaction-based system.
What will change
Under the new framework, interest rates will be determined using data from actual interbank transactions. That means the rates at which banks truly borrow and lend will form the basis of the benchmark.
BOFR will be calculated from secured interbank repo transactions, while DOMMR will be derived from unsecured interbank money market transactions.
In repo transactions, banks borrow funds on a short-term basis by providing government securities as collateral to the central bank or other banks.
Initially, BOFR will be published for overnight and one-week tenors, while DOMMR will be available for overnight, one-week, one-month and three-month maturities.
The rates will be calculated using a volume-weighted average method, giving greater importance to larger transactions.
Statistical techniques will also be applied to reduce the influence of outlier trades, as unusually high or low rates from a small number of transactions could otherwise distort the overall benchmark.
Global context
The shift is also aligned with global financial reforms. Previously, the London Interbank Offered Rate (LIBOR) served as the primary global benchmark. It was based on banks’ submitted estimates rather than actual transactions.
However, LIBOR’s credibility was severely undermined by rate manipulation scandals and structural weaknesses, including a lack of sufficient transaction data. As a result, global regulators phased it out.
It has since been replaced by transaction-based benchmarks such as the Secured Overnight Financing Rate (SOFR), which is calculated from actual repo transactions backed by US Treasury securities.
Unlike LIBOR, SOFR reflects real market activity, making it a more reliable benchmark in global finance.
Bangladesh Bank’s Debt Management Department Director Istequemal Hussain told TIMES, “LIBOR was previously used globally as a reference rate, but it was estimate-based. DIBOR in Bangladesh followed a similar model. Now, globally, SOFR is used. BOFR will serve as a similar reference rate in Bangladesh. It will be used in both the local currency and foreign exchange markets and will help restore discipline in the market.”
Market response
Bankers have welcomed the initiative but urged careful implementation.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank and former chairman of the Association of Bankers, Bangladesh, told TIMES, “There should be a proper reference rate. If this initiative is implemented effectively, it will be positive.”
He added a note of caution: “We must ensure that the weaknesses that caused DIBOR to fail are not repeated in the new system.”
