Stanbic Holdings risks making a payment of Sh1.4 billion this year arising from a commercial contract it had guaranteed.
Stanbic undertook to refund an unnamed customer the money it had paid another company in a contract known as advance payment guarantee which triggers claims whenever the cash recipient is unable to deliver the required goods or services.
Banks charge fees to issue such guarantees and may also take security to reduce their exposure.
“The guarantee was issued on behalf of a well-rated foreign bank and a claim has arisen following a disagreement between the applicant (client of the foreign bank) and the beneficiary,” Stanbic says in its latest annual report.
The potential amount of payments that the group could be required to make if there was an adverse decision is estimated to be up to $14.6 million (Sh1.4 billion).
The amount is nearly a quarter of the Nairobi Securities Exchange-listed firm’s net earnings of Sh6.2 billion in the year ended December, underlining the impact of the potential cash outflow.
The lender has provided legal fees of $1.5 million (Sh151 million), indicating that it has taken legal steps to protect itself in the ongoing dispute.
Stanbic says that its legal defence is strong but that it has been engaging the various parties to the contract in a bid to resolve the matter amicably.
“These efforts are progressing well and there is a high likelihood the matter shall be resolved in 2019,” the company said.
Stanbic’s external auditors PricewaterhouseCoopers (PwC) noted that there is no telling how much the bank could be required to pay in the dispute, underlining the uncertainty brought by the contract.
“The final outcome, once the matters are resolved, could be materially different from management’s estimation and hence this is considered a key audit matter,” PwC said in its report.
Advance payment guarantees give customers the confidence that in case a supplier does not honour the tender agreement the upfront cost will be catered for by the financier.