The cooperative reveals the rate of loans in foreign currencies

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The cooperative reveals the rate of loans in foreign currencies


Co-operative Bank branch along Haile Selassie Avenue, Nairobi. FILE PHOTO | NMG

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Summary

  • Banks have the flexibility to create their own interest rate structures or adopt new emerging alternatives like the Secured Overnight Financing Rate (SOFR).
  • SOFR is based on transactions in the US Treasury repurchase market and is considered more reliable than LIBOR since it is based on observable transactions rather than estimated borrowing rates.
  • Co-op Bank indicates in its latest annual report that it has developed its own pricing system for foreign currency loans.

Co-op Bank has developed an internal framework for pricing foreign currency loans as the global banking industry transitions from the London Interbank Offered Rate (LIBOR) which has been the dominant benchmark for decades.

LIBOR is the benchmark interest rate at which major global banks lend to each other. It is being phased out by June 30, 2023, after the big banks manipulated the rate for years, causing mistrust in the financial sector.

Banks have the flexibility to create their own interest rate structures or adopt new emerging alternatives like the Secured Overnight Financing Rate (SOFR).

SOFR is based on transactions in the US Treasury repurchase market and is considered more reliable than LIBOR since it is based on observable transactions rather than estimated borrowing rates.

Co-op Bank says in its latest annual report that it has developed its own pricing system for foreign currency loans, adding that customers who had borrowed on the basis of LIBOR will be migrated with no change to what they were previously paying.

“The bank has adopted an internal bank base rate for all credit facilities denominated in foreign currencies. Existing interest rates for existing borrowers will be retained for all outstanding foreign currency denominated credit facilities using the internal base rate,” Co-op Bank said.

“It is expected that all customers will therefore benefit from the new bank base rate no later than October 2021. The pricing of the new foreign currency denominated credit facilities will then be indexed to their internal bank base rate. This effectively retains the current rates offered under the respective products.

The Nairobi Stock Exchange-listed lender added that it had sent specific letters notifying it of the change from the LIBOR benchmark rate to the new base lending rate in August 2021.

Lenders typically use benchmarks as a starting point for loan pricing, with a margin added and that is determined by a number of factors including the term of the credit facility.

Kenyan banks are expected to switch from LIBOR by June next year. The Central Bank of Kenya said last year that 27 institutions had an exposure of 695.3 billion shillings to expiring LIBOR.

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