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Kenya has axed international guarantors out of the multi-billion government-to-government (G2G) oil importation deal that will now remove the 0.7 per cent interest rate in new move to review the financing terms.

The review comes barely three months since the deal was signed with the aim of combating the dollar shortage and finally rescuing the shilling from sliding further.

It leaves only domestic banks, comprising KCB, Equity, Co-operative, and Stannic as the only primary G2G financiers through issuing of Letters of Credit (LCs) to oil marketing companies importing the cargo.
The local banks offer lower interest rate of 0.4 per cent to issue the LCs that were being guaranteed by a host of 10 international banks mobilised by the Trade and Development Bank (TDB), the financial arm of the Common Market for Eastern and Southern Africa (Comesa).

The higher 0.7 per cent rate demanded by global financiers was premised on the assumption of high default risks because it was a new system implemented on the back of dollar shortage.
According to financing parties and the government of Kenya, the projected risks have since diminished, hence no need for guarantors.

“Because it was a new structure, there were some learning. The risks that may be perceived in that structure does not exist and we are able to get some efficiencies out of it,” said TDB Chief executive Michael Awori (pictured) after the bank’s AGM yesterday.

Energy Cabinet Secretary Davis Chirchir told the National Assembly Departmental Energy committee last week that by the end of June 2023, KCB Bank had paid Sh57 billion for the oil imported by the few OMCs that were nominated to partake in the deal.

There is also another $503 million (Sh70.9 billion) sitting in the escrow account meant to offset the upcoming cargo.

LC issuance is generally delivered by an importer’s bank, guaranteeing the amount will be paid once the credit period lapse while LC confirmation is an extra guarantee by a second bank in the event the first bank fails to honour the obligations.

It is useful for goods and services destined for frontier markets where legislation and bank reputation are questionable. “The end goal is to have security of oil supply and reduce the cost of financing,” added Awori.