Source: Business Daily.
Original article available here.
NAIROBI, April 25 – Standard Chartered Bank Kenya has arranged the first cross currency swap for a microfinance institution to Faulu Kenya, helping the company guard against foreign exchange related risks.
A cross currency swap (CC Swap) is an instrument used to hedge against adverse currency movement and involves the swapping of the interest-rate and currency risk on a loan.
Faulu Kenya has obtained a subordinate loan of Sh491 million in Euros (USD 7.9 million) from Deutsche Bank Micro Finance Funds in New York. Through the deal, Standard will lock the exchange rate for the loan over a seven year term.
“As all our business is based in Kenya shillings, it became necessary to hedge the foreign currency risk. StanChart’s facility ensures that this risk is not passed on to our customers,” said Ms Lydia Koros, Faulu Kenya’s managing director. A CC swap is often used in conjunction with the issue of a debenture loan. Using a CC swap also moves to reduce funding charges in a transaction.
The swaps are suitable for companies that wish to control the interest-rate risks in foreign currencies stemming from their standard business operations.
In recent months, the shilling has seesawed against major currencies egged on by the crisis that erupted after the disputed General Election.
As is the case in any other forex market, the negative sentiment — in light of heightened political risks — hit the local currency markets, moving to unsettle the rhythm of a steadily strengthening shilling.
This rendered businesses and institutions that operate or obtain funding in foreign currency unable to assess foreign exchange risks, exposing them to massive losses arising from adverse currency movements.
MFI’s such as Faulu were doubly hit. As principal lenders to small businesses the post election crisis exposed them to severe tests of huge loan defaults and massive write-offs sets in.
The transaction allows Faulu Kenya to access Sh460 million (USD 7.4 million) without having to bear any foreign exchange risks.
The working relationship, with StanChart, has enabled Faulu to benefit from the making use of the bank’s technology framework. As it is not allowed to take any deposits, Faulu’s client’s deposit money at StanChart, the accounts are then accessed on the end of the MFI through an internet web banking facility.
“This has enabled us to reduce transaction costs passing on the benefits to our clients,” said Ms Koros. Faulu will then pump the cash into the micro financing initiatives even as the MFI embarks on becoming a deposit taking institution.
The components that determine the price of a currency transaction, such as the duration, rate and supply and demand on the currency market, are subject to change during the term.
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