Commodities

5 banks to issue letters of credit for UAE fuel

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Fuel prices at a petrol station in Nyeri town on September 15, 2022. PHOTO | NMG

Five local banks have been picked to issue letters of credit of up to Sh614.89 billion ($4.8 billion) for fuel that Kenya will import on credit from the United Arab Emirates over a nine-month period.

Disclosures, the Business Daily has seen, show that KCB, NCBA, Absa Bank Kenya, Stanbic Bank and Co-op Bank made the list alongside Africa Export-Import Bank (Afreximbank).

Kenya will from next month start importing diesel, super and jet fuel on credit for 180 days in a deal that government officials say is meant to ease a growing crisis in the foreign exchange market.

Read: Clear uncertainty over UAE fuel imports deal

The six banks will issue letters of credit to the oil marketer (s) that will be picked by the government to enter into an import deal with oil dealers from the United Arab Emirates.

“Based on the request, the Government of Kenya confirms that it has a consortium of banks who shall issue and confirm Letters of Credit to an upper limit of $4.8 billion,” Mohamed Liban, the Energy and Petroleum Principal Secretary said.

The disclosures further show First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Emirates NBD, Deutsche Bank, Mashreq, Mizhuo, Natixis and Afreximbank are among the 12 banks that have agreed to honour the letters of credit.

A letter of credit is proof of the commitment that a bank issues on behalf of an importer. It offers comfort to the supplier of the goods.

A letter of credit transfers risk from the buyer to the issuing bank and places the lender under obligation to pay even if the buyer goes bankrupt.

Banks charge fees to issue such guarantees and may also take security to cut their exposure. The contracts rarely lead to losses for the lenders.

The deal that will see Kenya import diesel, super and jet fuel on a credit of 180 days is aimed at propping the shilling against the dollar.

Kenya targets to import between 3,870,000 to 4,230,000 metric tonnes of diesel and 3,060,000 to 3,420,000 metric tonnes from April 1 to December 31.

The country will also import 810,000 to 900,000 metric tonnes of jet fuel in the nine-month period in the deal that has, however, left out kerosene.

Local oil dealers will then be required to buy the fuel cargo shipped in through the government-to-government deal, for both local and transit markets.

The shilling on Monday hit a fresh record of 128 units against the dollar setting up consumers to costly imported goods such as cars, electronics and machinery as well as power bills.

Traders are also struggling to access dollars in a market where manufacturers have repeatedly raised the alarm over the scarcity of the US currency.

The Central Bank of Kenya last week directed commercial banks to ration dollars following a shortage of the currency and the race to protect reserves.

Read: Kenya will import UAE oil on credit to ease dollar woes

Local banks have imposed a daily cap on dollar purchases of as little as $5,000 as firms struggle to obtain adequate forex to meet their supply needs.

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