Banks in Seychelles transitioning foreign currency loans away from LIBOR
CBS said the transition is not something that is affecting Seychelles alone as it is a global issue. (Seychelles News Agency)
(Seychelles News Agency) - The contracts of around 185 clients with foreign exchange loans in Seychelles will be amended as commercial banks transition from LIBOR, one of the main interest rate benchmarks used globally in financial markets, to alternative rates.
In existence for over 30 years, the London Inter-Bank Offered Rate (LIBOR) is regulated by the United Kingdom's Financial Conduct Authority (FCA) and administered by the Intercontinental Exchange Benchmark Administration.
The ABSA Bank Seychelles, Mauritius Commercial Bank (MCB) and Nouvobanq have confirmed certain exposures to LIBOR and are obliged to inform their clients of necessary adjustments in contracts. The banks have already started contacting their clients, explaining how they will be affected and which plans have been developed to address the impact of the transition.
The second deputy governor of the Central Bank of Seychelles, Jenifer Sullivan, told reporters on Thursday that the transition is not something that is affecting Seychelles alone as it is a global issue.
"Banks have a plan to meet the deadlines. An interest rate is a key element in a bank contract and clients aren't expected to be worse off after the transition. New rates will be used, where there might be adjustments made but as a client, a person should not be paying more interest than they previously were through the contract that was making reference to LIBOR," said Sullivan.
The head of business banking at ABSA Bank Seychelles, Egbert Laurence, said that to qualify for a loan in foreign currency, the client should be in a position where they can earn in foreign currency.
"This is to avoid exchange risks. It is mostly from the tourism sector that we get clients who have a foreign exchange loan," he continued.
Moving forward, the banks will have the option to choose from alternative benchmark reference rates that have been developed as potential replacements to the current LIBOR.
LIBOR is derived from the rates at which a group of panel banks indicate they are willing to lend to each other on an unsecured basis. Benchmark interest rates are a core component of financial markets and LIBOR is the most widely used benchmark for short term interest rates
It is published daily in five different currencies - United States Dollar, Euro, Pound Sterling, Swiss Francs and Japanese Yen, and in seven different tenors, notably overnight, 1 week, 1-, 2-, 3-, 6- and 12-months. Financial institutions use the published rates as a benchmark for various financial products and contracts, such as loans, bonds, and others.
In 2017, FCA formally announced that it would no longer compel the banks to submit rates for the calculation of the LIBOR after 2021, given that following the global financial crisis in 2008, the market for unsecured wholesale borrowing from which LIBOR was being derived, was no longer sufficiently active.
In March 2021, the FCA announced that the publication of all GBP, EUR, CHF, JPY and the 1 week and 2 months USD LIBOR will cease after December 31, 2021. Publication of the USD overnight, 1-, 3-, 6- and 12-months LIBOR will be discontinued after June 30, 2023.
As such, no new transactions or contracts referencing LIBOR should be initiated after 2021 and market participants are being encouraged to start making use of the alternative rates.
These include Secured Overnight Financing Rate (SOFR) for dollar, Euro Short Term Rate (ESTR) for euro, Sterling Overnight Index Average (SONIA) for pound sterling, Tokyo Overnight Average (TONA) for the Japanese Yen and Swiss Average Rate Overnight (SARON) for Swiss Francs. Another option for euro is the Euro Interbank Offered Rate (EURIBOR), and it is currently being used in Seychelles.
Clients who feel they might be affected by the transition and who have not been contacted by their banks are requested to do so. Loans given in Seychelles rupees will not be affected by this transition.