About 27 Kenyan banks are holding onto part of Sh695 billion LIBOR linked products from international lenders and assets, exposing them to risks in the event they don’t transition to alternative rates within 12 months, the Central Bank of Kenya (CBK) has said.

CBK says the lenders are required to transition the loans from Libor interest rates to alternative rates by June 2023.

“There were various risks associated with cessation of LIBOR. The banks acknowledged that cessation would pose legal, operational, reputational and counterparty risks,” said CBK in the latest annual banking sector report.

Benchmark interest rate The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.

Lenders use LIBOR as the benchmark reference for determining interest rates for various debt instruments and is also used as a benchmark rate for mortgages, loans, and government bonds in various countries.

The Financial Conduct Authority (FCA), which regulates LIBOR, announced in 2017, that it would no longer compel the panel of banks to continue submitting quotes for LIBOR after December 2021, following attempts to manipulate key global benchmark rates.

The products include loans amounting to Sh450.5 billion, representing 14.2 per cent of the total banking sector loans, tier two capital instruments worth Sh88.8 billion, representing 12.8 per cent of total products priced on LIBOR and 81.4 per cent of total tier two Capital.

There is also exposure to other banks amounting to Sh75.2 billion, representing 22.4 per cent of total banking sector placements with other banks plus deposits of Sh60.7 billion, representing 1.4 per cent of total banking sector deposits and off-balance sheet commitments of Sh20.1 billion.

“To mitigate these risks and facilitate a smooth transition to Alternative Reference Rates (ARR) banks were, among other things, reviewing legal loan contracts to provide a clause for transitioning to ARR,” said CBK.

They are also reviewing and upgrading systems to support a smooth transition to ARR. The alternative reference rate will be the Secured Overnight Financing Rate (SOFR) for dollar-denominated loans.