The Central Bank of Kenya (CBK) has revealed that 27 local lenders have an exposure of Sh695.3 billion to the expiring London Inter-Bank Offered Rate (Libor), asking them to put in place an alternative reference rate by the end of the year to avoid disruptions in payment flows.
The Libor is deployed as a reference rate when pricing credit or financing in the international markets, with local banks using it for loans, deposits, off-balance sheet commitments and Tier II capital instruments over various tenors.
The CBK said the proportion of loans priced on Libor stood at 450.6 billion, which is 14.2 percent of total banking sector loans and 52.2 per cent of foreign currency-denominated loans as of September 30.
At the end of this month, all British pound, euro, Swiss franc and Japanese yen instruments, and the one-week and two-month US dollar instruments will stop using the rate.
“Without advanced preparation, a sudden cessation of such a heavily used reference rate would cause considerable disruptions to, and uncertainties around the large gross flows of Libor–related payments and receipts between many firms,” said the CBK in a circular to banks.
“CBK is aware of the potential financial, legal and reputational risks associated with inadequate preparation on financial institutions and the industry. Therefore, the onus of a timely and orderly transition remains purely on financial institutions to manage through well-designed transition programmes with appropriate levels of governance and oversight.”
Libor, the global benchmark interest rate of over 40 years, is set to be abolished after investigations in 2012 revealed multiple banks — including Barclays, Deutsche Bank, Rabobank, UBS and the Royal Bank of Scotland — were manipulating the rates for profit.
This means that any financial contracts which refer to or rely on Libor will be rendered ineffective after 31 December 2021.
CBK said it met all bank CEO’s in mid-September and they assured the regulator they are aware of the expected changes and have put in place plans to facilitate smooth transition to alternative reference rates.
Banks, microfinance companies and mortgage finance companies have set up transition teams to manage the process review “legacy” contracts to confirm that they contain provisions for continuity for instance through reliance on alternative interest rates in the absence of Libor.
https://www.businessdailyafrica.com/bd/markets/capital-markets/local-banks-hold-sh695bn-contracts-pegged-libor-3650432
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