Lenders start repricing foreign currency loans

Kenyan lenders have started transitioning their loans, deposits and borrowings whose interest rates are pegged on the expiring Libor. FILE PHOTO | NMG

Kenyan lenders have started transitioning their loans, deposits and borrowings whose interest rates are pegged on the expiring London Inter-Bank Offered Rate (Libor).

Libor, the global benchmark interest rate of more than 40 years, is being replaced after investigations in 2012 revealed multiple banks were manipulating the rates for profit.

Standard Chartered Bank Kenya disclosed in its annual report that it has already transitioned exposure worth Sh2.26 billion while Absa Kenya reported Sh8.2 billion worth of Libor linked loans that transitioned at the end of December.

At the end of December, all British pound, euro, Swiss franc and Japanese yen instruments, and the one-week and two-month US dollar instruments stopped using the rate.

US dollar overnight, one, three, six and 12-month instruments will in the meantime expire at the end of June 2023.

StanChart still held facilities worth Sh42.7 billion and Absa Sh57.8 billion under the US Libor contracts that expire next year.

The Central Bank of Kenya said last year 27 lenders had a total exposure of Sh695.3 billion to the expiring Libor.

“The Pound, Euro, Yen and US Libor have transitioned to the Sterling Overnight Index Average, Euro Short-Term Rate, Tokyo Overnight Average Rate and Secured Overnight Financing Rate (SOFR), respectively as alternative reference rates,” said Absa in its 2021 annual report.

Other tier-one lenders have also disclosed their Libor exposure, including DTB, which said in its annual report it had loans and borrowings worth Sh87.8 billion referenced to the expiring reference rate.

“As at 31 December 2021, the Group has loans and advances of Sh67.6 billion and borrowings of Sh20.2 billion at interest rates referenced to the libor,” said DTB in the report.

Co-operative Bank on its part outlined loan products worth Sh13.3 billion tied to Libor, which it is transiting to its internally developed framework for pricing foreign currency loans.

The lender also told shareholders that an outstanding Sh8.5 billion tier-II capital facility borrowed from the International Finance Corporation would be changing from Libor to the new US reference SOFR.

“The Bank has received notice of intention to transition the Tier II Capital Facility, as well as other borrowed facilities, to the new international benchmark rates for USD facilities (SOFR) by June 2023,” said Co-op Bank.

Banks have the option of creating their own interest rate structures or adopting new alternatives.

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