Co-operative Bank of Kenya has boosted its capacity to provide long-term dollar financing to Kenyan businesses after securing a $100 million (Sh12.9 billion) currency swap programme with the European Bank for Reconstruction and Development (EBRD).
A currency swap allows two parties to exchange a loan in one currency for an equivalent loan in another currency. The swap locks in a pre-agreed exchange rate, protecting both parties from market changes.
At the start, they exchange the principal amounts at an agreed exchange rate. During the swap, each party pays interest on the currency it has received. At the end, the principal amounts are exchanged back.
Currency swaps are used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing directly in a foreign market.
The first $50 million (Sh6.5 billion) tranche of the programme has been executed through a cross-currency swap using the Kenya Shilling Overnight Interbank Average (Kesonia) as a reference rate, making it the first such transaction in the country to use the benchmark.
The arrangement is expected to strengthen Co-op Bank’s ability to provide long-term foreign-currency financing to businesses, particularly those with revenues, costs or contractual obligations denominated in foreign currencies.
The structure gives Co-op Bank additional capacity to mobilise dollar funding while managing the foreign-currency and interest-rate risks associated with conventional dollar borrowing.
Co-op Bank’s chief executive Gideon Muriuki said the currency swap with the multilateral bank would enhance the local lender’s ability to provide long-term foreign-currency financing to businesses.
‘Our partnership with the EBRD under this $100 million currency swap programme represents an important milestone in our commitment to supporting Kenyan businesses with innovative financing solutions,’ said Mr Muriuki.
‘The first $50 million tranche enhances our ability to provide long-term, competitively priced foreign currency financing to help businesses strengthen their competitiveness while contributing to Kenya’s economic development and job creation.’
The bank’s target sectors include exporters, manufacturers, agriculture and agro-processing, horticulture, floriculture, logistics and tourism.
The arrangement is especially relevant to companies participating in regional and global value chains, which often have revenues, costs or contractual obligations denominated in foreign currencies.
Businesses can use the financing to acquire machinery, equipment, technology and raw materials, as well as meet working-capital requirements linked to imports and exports.
EBRD regional head of Local-Currency Portfolio Management, Abdessamad Abouti, said the transaction demonstrates the use of Kenya’s new benchmark in an international financial-market transaction, following efforts to develop local capital markets.
‘We have worked closely with local authorities and market participants to support the development of Kesonia, and this swap shows how reforms can move from design to implementation, reflecting the EBRD’s longstanding commitment to developing local capital markets,’ said Mr Abouti.
The EBRD deal is part of Co-op Bank’s strategy of working with international financial institutions to increase funding available to Kenyan enterprises and support trade and investment.