Co-op Bank has developed an internal framework for pricing foreign currency loans as the global banking industry transitions from the London Interbank Offered Rate (LIBOR) that has been the dominant benchmark for decades.
LIBOR is the benchmark interest rate at which major global banks lend to one another. It is being phased out by June 30, 2023, after big banks were found to have manipulated the rate for years, causing distrust in the financial industry.
Banks have the option of creating their own interest rate structures or adopting new emerging alternatives like the Secured Overnight Financing Rate (SOFR).
The SOFR is based on transactions in the US Treasury repurchase market and is seen as more reliable than LIBOR given that it is built on observable transactions rather than on estimated borrowing rates.
Co-op Bank says in its latest annual report that it has developed its own pricing system for foreign currency loans, adding that customers who had borrowed based on LIBOR will be migrated without a change in what they had been paying before.
“The bank adopted an Internal Bank Base Rate for all foreign currency-denominated credit facilities. The existing interest rates to existing borrowers will be retained for all outstanding foreign currency denominated credit facilities using the Internal Base rate,” Co-op Bank said.
“It is expected that all customers will hence be on the new Bank Base Rate latest October 2021. Pricing of new foreign currency-denominated credit facilities will subsequently be pegged to their internal Bank Base Rate. This effectively retains the prevailing rates offered under the respective products.”
The Nairobi Securities Exchange-listed lender added that it sent out specific letters giving notice of change of LIBOR reference rate to the new base lending rate in August 2021.
Lenders typically use the benchmarks as a starting point in pricing of loans, with a margin added and which is determined by a number of factors including the tenor of the credit facility.
Kenyan banks are expected to transition from LIBOR by June next year. The Central Bank of Kenya said last year that 27 institutions had an exposure of Sh695.3 billion to the expiring LIBOR.