Seychelles: Seychellois banks abandon foreign currency loans to Libor

The contracts of around 185 clients with foreign currency loans in Seychelles will change as commercial banks move from LIBOR, one of the main benchmark interest rates used in the financial markets around the world, to alternative rates. .

In existence for over 30 years, the London Inter-Bank Offered Rate (LIBOR) is regulated by the Financial Conduct Authority (FCA) of the United Kingdom and administered by the Intercontinental Exchange Benchmark Administration.

ABSA Bank Seychelles, Mauritius Commercial Bank (MCB) and Nouvobanq have confirmed certain LIBOR exposures and are required to inform their clients of necessary adjustments in contracts. Banks have already started contacting their customers, explaining how they will be affected and what plans have been made to deal with 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 affects Seychelles only because it is a global problem.

“Banks have a plan to meet deadlines. An interest rate is a key part of a banking contract, and customers shouldn’t be worse off after the transition. client, a person should not be paying more interest than before on the LIBOR-referenced contract, ”Sullivan said.

ABSA Bank Seychelles Head of Corporate Banking, Egbert Laurence, said that to be eligible for a foreign currency loan, the client must be able to earn in foreign currency.

“It is to avoid exchange risks. It is above all from the tourism sector that we receive clients who have a loan in foreign currency,” he continued.

In the future, banks will have the option of choosing from other benchmark benchmarks that have been developed to potentially replace the current LIBOR.

LIBOR is derived from the rates at which a group of banks in the panel indicate that they are willing to lend to each other without collateral. Reference interest rates are an essential 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 – US dollar, euro, British pound, Swiss francs and Japanese yen, and in seven different durations, including day-to-day, 1 week, 1, 2, 3, 6 and 12 months. Financial institutions use published rates as a benchmark for various financial products and contracts, such as loans, bonds, and others.

In 2017, FCA officially announced that it would no longer require banks to submit rates for LIBOR calculation after 2021, given that following the 2008 global financial crisis, the wholesale debt market was not collateral from which LIBOR was derived was no longer sufficiently active.

In March 2021, the FCA announced that the publication of all GBP, EUR, CHF, JPY and 1 week and 2 month USD LIBOR would cease after December 31, 2021. Publication of the overnight, 1 week USD , 1-, 3-, 6 and 12 month LIBOR will be discontinued after June 30, 2023.

As such, no new transactions or contracts referencing LIBOR are expected to be initiated after 2021 and market participants are encouraged to start using alternative rates.

These include the Secure Overnight Funding Rate (SOFR) for the Dollar, the Short Term Euro Rate (ESTR) for the Euro, the Average of the Overnight Index in Sterling (SONIA) for the pound sterling, the Tokyo overnight average (TONA) for the Japanese yen and the Swiss overnight average rate (SARON) for Swiss francs. Another option for the euro is the Euro Interbank Offered Rate (EURIBOR), and it is currently used in Seychelles.

Customers who feel affected by the transition and who have not been contacted by their bank are encouraged to do so. Loans made in Seychellois rupees will not be affected by this transition.

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