Following the first step in phasing out the London Interbank Offered Rate (LIBOR), consideration should be given to a continent-wide alternative reference rate (ARR) as it could have positive implications for trade, among other benefits, Managing Director of GCB Capital, Kofi El-Awuku, has proposed.
LIBOR, since its inception in the 1980s, has served as a globally accepted key benchmark interest rate that indicates borrowing costs between banks – providing loan issuers with a benchmark for setting interest rates on different financial products.
However, it was discovered in the wake of the 2008 financial crisis that the rate had been consistently manipulated, primarily by big banks for profit – hence the decision to phase out its publication beginning January 1, 2022, with the process expected to be completed by June 30, 2023.
Speaking in an interview with the B&FT, Mr. El-Awuku noted that with increased intra-continental interactions, particularly under the Africa Continental Free Trade Agreement (AfCFTA) and with the possibility of more continent-wide lending, a regional or continental reference rate would, in principle, be laudable…albeit one that would require a lot of groundwork.
“In principle, a regional or pan-African reference rate could be developed and would be fantastic for facilitating intra-continent trade and anchoring AfCFTA, for instance. It would, however, require quite a lot of prior work and systems; not least a single currency regime,” he said.
The GCB Capital MD was quick to concede that such a move would not be feasible in the short to medium term, and agreed that the Secured Overnight Financing Rate (SOFR) – which is administered and published by the Federal Reserve Bank of New York – remains the foremost alternative benchmark.
On the local front
Despite details remaining sparse over measures being undertaken by the central bank and local players to facilitate the transition, Mr. El-Awuku stated he believes steps are being taken in that regard and suggested they may be spearheaded by banks with foreign ownership.
“To the best of my knowledge, the Bank of Ghana has not issued final guidelines on this matter yet. I am certain the regulator is working on it. Nevertheless, some banks – especially those with offshore parents, are expected to take the lead on this switchover.
“My guess is that the regulator and the banks are carefully considering the matter and preparing their systems for the adoption of an alternative. LIBOR is being phased out, and not being terminated on a hard stop date of December 31, 2022; so there is still a bit of time for the adoption of an alternative reference rate. Indications are that some banks in Ghana are already switching to an alternative benchmark, the SOFR, effective this month of January 2022,” he explained.
He further stated that, on the whole, the cessation of LIBOR is not expected to cause sharp spikes or dips in foreign currency interest rates in Ghana – at least not in the near-term.
With the widespread implications of debt and the pricing of loans for government, business, and individual entities, he explained the need for increased vigilance and sensitisation by key stakeholders, especially as the financial sector emerges from a period of widespread mistrust.
“The entire world runs on credit, also known as debt or loan… so we are all deep in the credit market in some shape or form. This means that developments in loan interest rates affect everybody directly or indirectly. Therefore, we should all be interested in the basis for pricing loans; and collectively the business community, academia and civil society must maintain vigilance to stem the possible manipulation of loan reference rates by some entities for their parochial interests,” he noted.
“It is supremely important for the integrity of the markets – and also to prevent future disruption of pricing frameworks – that a broad, transparent and regulated system of setting reference rates is maintained at all times going forward.”