Singapore Interbank Offered Rates (SIBOR) – the current benchmark interest rate in Singapore – could well be discontinued in favour of the Singapore Overnight Rate Average (SORA) within a few short years. SORA is already slated to replace another widely used rate, the Singapore dollar Swap Offer Rate (SOR), by the end of 2021. However, the Association of Banks in Singapore (ABS), among other industry groups, has now recommended that the SORA be adopted as a single benchmark interest rate for the local financial markets.

SORA is the volume-weighted average rate of all unsecured SGD overnight interbank cash transactions brokered in Singapore. A daily overnight rate is calculated by taking all the transactions of interbank loans involving unsecured funds recorded by brokers for the day and taking the average. SORA is then further derived by taking the average daily overnight rate over a certain number of days.

SIBOR is the rate that Singaporean banks borrow from each other on the interbank market. Every business day, each bank in Singapore submits a borrowing rate which they have assessed for themselves individually. The average of these rates, after removing outliers, is then set as the SIBOR.

So why use SORA? In short, it is elegantly simple and transparent. Since SORA is purely derived from data – that of overnight recorded interbank transactions – there is no expert judgement required in the process, making it open to less subjectivity and easier for laymen to understand. This is in stark contrast to SIBOR, where the process for each bank to determine its declared borrowing rate is opaque.

In addition, SORA has been published by the Monetary Authority of Singapore (MAS) since 2005, so there is already sufficient history for market participants to conduct data analysis and model trends.

Ultimately, SORA is of comparable volatility to SIBOR and it benefits both consumers and banks to adopt a uniform interest rate benchmark; the former can compare different loan packages more easily and the latter face lower risks than when offering different financial products based on different interest rates.

SORA-pegged loan options are very limited right now, but as previously stated, it is slated to replace SOR by the end of 2021. SIBOR is also set to be discontinued by 2024. This means that realistically, SORA should be set to become the preferred benchmark borrowing rate within the next 2 years.