Implication of the abandonment of LIBOR
The end of 2021 saw the sunset for the London Interbank Offered Rate (‘LIBOR’), the most widely used interest rate benchmark in the world, Kenya included. In view of the announced LIBOR discontinuation, the Central Bank of Kenya in December 2021 published the Guidance on LIBOR Transition to guide banks, microfinance banks and mortgage finance companies during the transition.
The discontinuation of LIBOR does not only affect entities operating in the financial sector i.e., banks, but cuts across different sectors as the rate has been used in contracts across functions, internal processes and systems, leases, procurement, funding, pension plans and much more. The main implications of LIBOR discontinuation would be:
- Extensive Contract review.
- Contract Amendment and Renegotiation.
- Increased litigation claims.
To that end, we recommend more careful contract drafting going forward. The LIBOR sunset has indeed proven that contracts may be severely impacted by actions outside of either party’s control. Therefore, there is need to identify provisions that may be impacted by actions outside of either party’s control, and attempt to set in place a process or fallbacks in the agreement for managing any impactful changes.
