Lenders begin to revalue foreign currency loans
Kenyan lenders have begun transitioning their loans, deposits and borrowings whose interest rates are pegged to the expiring London Interbank Offered Rate (Libor).
The Libor, the benchmark global interest rate for over 40 years, is being replaced after investigations in 2012 revealed that several banks were manipulating rates for profit.
Standard Chartered Bank Kenya revealed in its annual report that it had already transferred exposure worth 2.26 billion shillings, while Absa Kenya reported 8.2 billion shillings of loans linked to the Libor which were transferred at the end of December.
At the end of December, all sterling, euro, Swiss franc and Japanese yen instruments, as well as one-week and two-month US dollar instruments stopped using the rate.
In the meantime, the one-, three-, six- and twelve-month US dollar instruments will expire at the end of June 2023.
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StanChart still held facilities worth 42.7 billion shillings and Absa 57.8 billion shillings under US Libor contracts which expire next year.
The Central Bank of Kenya said last year that 27 lenders had a total exposure of 695.3 billion shillings to expiring Libor.
“The Pound, Euro, Yen and US Libor moved to the Sterling Overnight Index Mid Rate, Euro Short Term Rate, Tokyo Overnight Mid Rate and Tokyo Overnight Mid Rate respectively. Overnight Funding (SOFR), as alternative benchmark rates,” Absa said in its 2021 annual report.
Other senior lenders have also disclosed their exposure to Libor, including DTB, which said in its annual report that it had loans and borrowings worth 87.8 billion shillings referenced to the rate of reference expiring.
“As of December 31, 2021, the group has loans and advances of 67.6 billion shillings and borrowings of 20.2 billion shillings at libor-referenced interest rates,” DTB said in the report.
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The Co-operative Bank, for its part, presented loan products worth 13.3 billion shillings linked to Libor, which it funnels into its internally developed framework for pricing foreign currency loans.
The lender also told shareholders that an exceptional Tier II capital facility of 8.5 billion shillings borrowed from the International Finance Corporation would be upgraded from Libor to the new US benchmark SOFR.
“The Bank has received a notice of intent to transition the Tier II capital facility, together with other borrowed facilities, to the new international benchmark rates for USD facilities (SOFR) by June 2023” , said Co-op Bank.
Banks have the flexibility to create their own interest rate structures or adopt new alternatives.