### Deposit/Savings Interest Calculation

In Deposit/Savings Products, interest is accrued daily on the account and applied at a later time. Both the balance used for accruing the interest and the date to apply it are defined by the settings explained in this article.

### What Account Balance is Used for Calculations?

• Average Daily Balance

If you choose this method, Kwara will calculate the average balance that the member had in the account during day, and calculate the daily interest based on that amount.

• Minimum Daily Balance

With this method, Kwara will use the minimum balance the member had in the account during the day, and will calculate the interest on that amount.

• End of Day Balance

With this method, Kwara will use the end of day balance the member had in the account, and will calculate the interest on that amount. For this method, you can also choose a Maximum Balance to be used for Interest Calculation and if the End of Day Balance is greater than the Maximum Balance, then Kwara will calculate interest based on this value instead and will only use the End of Day Balance when it falls below the Maximum Balance.

Example:
Day 1(starting account balance = 0)

• No transactions.

• Average daily balance for interest calculation = 0

• Minimum daily balance for interest calculation = 0

Day 2 (starting account balance = 0)

• 40 Deposit > Balance = 40

• 5 Withdrawal > Balance = 35

• 25 Deposit > Balance = 60

• Average daily balance for interest calculation (0+40+35+60)/4 = 33.75

• Minimum daily balance interest accrued = 0

Day 3 (starting account balance = 60)

• No transactions.

• Average daily balance for interest calculation = 60

• Minimum daily balance for interest calculation = 60 ### When is the interest paid into the account?

Here you can define the date when the interest is actually posted to the member's account.

For products with a maturity date an extra option is displayed, "on account maturity", this means that interest will be posted to the account when it reaches the maturity date.

On Fixed Dates option allows adding up to 12 fixed dates, but not the same date twice. ### What Account Balance is Used for Calculations?

Minimum daily balance
→ When using this option, Kwara will calculate interest based on the maximum amount the customer has been overdrawn for a given day. This means that if an account was overdrawn by 100 euros in the morning and the account holder makes a payment of 50 euros in the afternoon, interest will still be charged on a value of 100 euros.

### When is the interest paid into the account?

Interest will be accrued daily when an account has gone overdrawn and will be paid into the account at the same frequency as any positive interest would be. This is configurable in the product settings in the Interest rate section.

Just like for positive interest, interest accrued from overdrafts can also be applied manually. From the account detail page for an account with Overdraft Accrued Interest greater than 0, simply click More > Apply Accrued Interest

### Interest Rate Terms

Two interest rate terms are available for Deposit Products allowing Overdrafts: Fixed & Tiered.

When selecting a Tiered interest rate, you can select a starting and ending balance for each tier and an associated interest rate. When interest is accrued on the account, Kwara will determine the interest rate from the tier corresponding to the account's Minimum Balance balance at accrual moment (mathematical minimum; which, if the balance is negative, is the equivalent of the maximum overdrawn amount).

The interest rate displayed on the account will be updated based on the current account balance and will be changed every time the account balance matches another tier.

When clicking on the “Current Interest Tier”, a dialog will be displayed that shows all the tiers that are available for that account. When changing the positive interest rate tiers on the product, you can choose to update existing accounts with the current changes performed on the tiers.

The tiers can be printed in contracts and any other product documents using available placeholders. These placeholders can be indexed with the tier number, so all the tiers defined in the product can be printed in the document. For example:
• Tier 1 Interest Rate: {INTEREST_TIER_RATE:1,numericPattern=#,###.##}
• Tier 2 Interest Rate: {INTEREST_TIER_RATE:2,numericPattern=#,###.##}

### Interest Rate Source

Two sources of interest rates are supported for Deposit Products allowing Overdrafts:

### 1. Fixed Interest Rate

A fixed interest rate is agreed upon at account opening and remains fixed until renegotiated. Please see example below.

### 2. Index Interest Rate

A floating interest rate is also known as a variable or adjustable rate. It is calculated as the sum of a reference (benchmark) index interest rate and a specified spread (margin). As a result, index interest rates will change as the reference (benchmark) index interest rate changes.  Please see example below

By selecting Index Interest Rate option, you can define:

1. Interest Spread constraints  - to define constraints of spread that will be added to the reference index rate

2. Interest Rate Review Frequency  ­- how often should the overdraft interest rate be updated (reviewed)

Index Rates are managed under Administration > General Settings > Rates, where you can create and manage index rate sources as well as update the rates.

Additionally, the frequency for which the interest is reviewed is determined when creating a product. If there is a new Index Rate at the end of the indicated frequency period, the Index Interest Rate will be updated and Kwara will log an Overdraft Interest Rate Changed transaction on the account to mark that the rate was changed at that time.

### Days in Year

You can choose from four different day count methods for interest calculation on overdrafts:

1. Actual/365 Fixed (365 days) is the method that calculates the interest daily by counting the actual number of days in the calendar and uses a fixed 365 year length;

2. 30E/360 (360 days) counts the days from the calendar, but also introduces some changes on the months with 31 and 28 days.

3. Actual 360 is the method that calculates interest daily by counting the number of days in the calendar, but uses a fixed 360 year length

4. Actual/Actual ISDA is the method that calculates the interest daily by counting the number of days in the calendar and also considers leap year.

### Particularities in the 30E/360 method

• If the month has 31 days, it will be considered as having 30. This implies that on the 31st of that month the number of accrued interest days will be the same as on the 30th.

• The last day of February is treated as the 30th day of the month

• Interest will be computed with the assumption that there are 360 interest days in a year. So for instance, if a loan account has repayments paid yearly, the interest will be calculated for 360 days, instead of the actual number of days in the calendar year.

Resource

You can find sample calculator for Day Count using the 30E/360 methodology recommended by ISDA under the below link: 30E/360 Eurobond.

### Example of overdraft interest calculation (Fixed Rate)

Let's assume an Overdraft account with a 10% overdraft interest rate and interest calcuated based on the Minimum daily balance.

Day 1:

• Starting account balance: \$0

• At 10:00:00 a withdrawal of \$100 is made, account balance is \$ -100

• At 20:00:00 a second withdrawal of \$200 was made, account balance is \$ -300

• End of day balance \$ -300 = Minimum daily balance

• Overdraft interest for Day 1: \$ -300 (Minimum balance from Day 1) * 10% (Overdraft daily interest rate) = \$ -30

• Total accrued interest on account: \$ -30

Day 2

• Starting account balance: \$ -300

• No transactions are posted that day

• End of day balance \$-300 = Minimum daily balance

• End of day accrued interest on account: \$ -30 (from Day 1)

• Overdraft interest for Day 2: - 300 (Minimum balance from Day 2) * 10% (Overdraft Interest rate) = \$ -30

• Total accrued interest on account: \$ -60

### Example of Overdraft Interest Calculation (Index Rate)

One of the most common reference rates to use as the basis for applying floating interest rates is the London Inter-bank Offered Rate (LIBOR) - the rates at which large banks lend to each other.

We have based our example on the LIBOR index (reference) rate, reviewed daily and spread of 1% and interest calculated based on the Minumum daily balance.

Day 1

• LIBOR Overnight on Day 1 = 0.2%

• Overdraft daily Interest rate = 0.2% LIBOR Overnight on Day1 + 1% Spread = 1.2%

• Starting account balance: \$0

• At 10:00:00 a withdrawal of \$100 is made, account balance is \$ -100

• At 20:00:00 a second withdrawal of \$200 was made, account balance is \$ -300

• End of day balance \$ -300 = Minimum daily balance.

• Overdraft interest for Day 1: \$ -300 (Minimum balance from Day 1) * 1.2% (Overdraft daily Interest rate) = \$ -3.6

• Total accrued interest on account: \$ -3.6

Day 2

• LIBOR Overnight on Day 1 = 0.5%

• Overdraft daily Interest rate = 0.5% LIBOR Overnight on Day 2 + 1% Spread = 1.5%

• Starting account balance: \$ -300

• Accrued interest on account: \$ -3.6

• No transactions are posted that day

• End of day balance \$ -300 = Minimum daily balance

• Overdraft interest for Day 2: \$ -300 (Minimum balance from Day 2) * 1.5% (Overdraft daily Interest rate) = \$ -4.5 (Day 2 interest accrued)

• Total accrued interest on account: \$ -8.1 (= -3.6 -4.5)