Two Kenyan banks held loans worth Sh5.2 billion that were still pegged on the defunct London Interbank Offered Rate (Libor) at the end of 2024, awaiting approval from customers on the new reference rates to apply to the facilities.
The Central Bank of Kenya (CBK) disclosed the outstanding exposure in its bank supervision annual report for 2024, adding that the loans had fallen from Sh11.1 billion in 2023, which was held by eight banks.
Libor was used for over 40 years as a reference rate when pricing credit or financing in the global markets, with local banks using it for loans, deposits, off-balance sheet commitments, and Tier II capital instruments over various tenors.
The rate was discontinued from 2021 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. It was replaced by new reference rates developed by financial regulators, including the US Federal Reserve.
To manage the transition in an orderly manner following the expiry of the last Libor rates in June 2023, the UK’s Financial Conduct Authority (FCA) –which had overall authority over Libor— announced a temporary bridge rate known as a synthetic Libor for legacy facilities that were on the one, three, and six month US dollar Libor.
The publication of the synthetic Libor rates ceased at the end of September 2024, marking the final milestone in the transition away from the rate. Those holding synthetic Libor facilities were required to continue efforts to transition to new rates ahead of the deadline.
“As a result, two banks had loan facilities valued at Sh5.2 billion as at December 31, 2024, compared to eight banks with loan facilities valued at Sh11.1 billion in December 2023, priced on synthetic Libor,” said the CBK in the supervision report.
“These were mainly syndicated term loans involving different lenders, and transitioning from Libor was at an advanced stage. It also included facilities for customers who had not signed off on legal documents for their preferred alternative reference rates.
The CBK had been helping Kenyan banks manage the transition since December 2021, when the first of the various Libor rates expired.
At the time, 27 local banks had an exposure of Sh695.3 billion to the rate, which would be phased out over 18 months between December 2021 and June 2023.
CBK issued a guidance note to banks on December 9, 2021, requiring them to appraise it on their exposures to Libor, transitional arrangements, potential risks, and possible mitigation measures.
All British pound, euro, Swiss franc, and Japanese yen instruments, and the one-week and two-month US dollar instruments stopped using the rate in 2021, while the other US dollar rates (overnight, one, three, six, and 12-month instruments) expired in June 2023.
New reference rates that came up after Libor included the Sterling Overnight Index Average (SONIA) for the UK, Euro Short-Term Rate (€STR), Tokyo Overnight Average Rate (TONAR), and the Federal Reserve’s Secured Overnight Financing Rate (SOFR).
