EBRD and Co-operative Bank execute US$50m KESONIA cross-currency swap

The European Bank for Reconstruction and Development and Co-operative Bank of Kenya have executed a US$50m cross-currency swap in the first transaction to use Kenya’s new KESONIA reference rate, creating additional infrastructure for local-currency corporate financing.

The agreement, equivalent to €43.1m, represents the first utilisation of a broader US$100m programme established between the two institutions.

It is also the first cross-currency swap to use the Kenya Shilling Overnight Interbank Average, or KESONIA, as its reference rate.

The structure is significant because the transaction is a funding and currency-risk instrument rather than a conventional loan to Co-operative Bank or directly to Kenyan companies.

For the EBRD, the swap strengthens its ability to raise and manage Kenyan-shilling funding. The development bank said this should allow it to provide more local-currency financing to businesses whose revenues are primarily denominated in shillings, reducing the need for those borrowers to assume foreign-exchange exposure.

That can be particularly important for businesses that generate domestic revenues but require longer-term external financing. Borrowing in dollars or euros while receiving cash predominantly in shillings can increase debt-service costs sharply if the local currency weakens.

The transaction also gives KESONIA an important live-market test.

Kenya is moving towards the new benchmark for domestic financial transactions, and using it in a cross-currency derivative creates a reference point for pricing and risk management in a market where consistent local benchmarks are important to the development of longer-term funding instruments.

The EBRD said wider use of KESONIA should support more transparent pricing, better risk management and greater participation by domestic and international investors.

For working-capital and transaction-banking providers, the immediate relevance is indirect but significant. Deeper local-currency funding and hedging markets can make it easier for banks and development institutions to finance businesses without transferring unnecessary currency risk to the underlying borrower.

Pricing, maturity and the timing of any further utilisation under the remaining US$50m programme have not been publicly disclosed by the EBRD.