The Role of corporate governance in the successful transition to Risk-Free Rates (RFRs) by banks in Kenya

Abstract

The Global Financial Crisis (GFC) of 2007-08 unearthed a global scandal in the manipulation of benchmark rates like the London Interbank Offered Rate (LIBOR). For over five decades, Interbank Offered Rates (IBORs) served as references and benchmarks in the development and negotiation of financial instruments globally. However, on the tail of the GFC, it was discovered that panel banks had been manipulating their LIBOR submissions to appear more creditworthy and maximise profits on LIBOR-based contracts. This prompted a debate on reform which led to the termination of the mandatory publication of LIBOR from December 2021 and its end in October 2024. In its place, risk-free rates (RFRs) were proposed and adopted as an alternative. The transition from LIBOR to RFRs has been a significant undertaking which was limited in terms of time. There were several concerns over how to ensure a successful transition and whether RFRs are the most suitable replacement. In Kenya, the weight of ensuring a successful transition from LIBOR to RFRs was placed on Board Directors and Senior Management in the financial sector. However, other than a CBK-issued guideline on the expectations of the transition, there were no regulatory undertakings to guide the process. This pegged the transition to RFRs in Kenya on the existing legal and regulatory frameworks. Anchored on the stakeholder theory and the public interest theory, this doctrinal legal research set out to explore the corporate governance landscape in Kenya’s financial sector. It was guided by best practices borrowed from the US and the UK to determine whether the elements of corporate governance found within the existing Kenyan framework were sufficient to guarantee a successful transition from LIBOR to RFRs. The study finds that, while financial institutions made commendable efforts to mitigate risk, the Kenyan corporate governance framework is limited with respect to government supervision. Supervisory authorities have continuously taken a laissez-faire approach to oversight and this was no different with the transition. A more proactive and collaborative strategy, as adopted in the US and the UK, anchored in public interest and leveraging technology to facilitate automation would strengthen corporate governance supervisory and enforcement efforts in the country.