Kenya's Energy and Petroleum Regulatory Authority has revealed in a disclosure that five new banks have signed up to take part in the Kenyan government's lucrative US$500 million per month oil import scheme with the UAE and Saudi Arabia.

Amidst increased competition for the issuance of letters of credit (L/Cs) to selected local importers under the scheme with the two Gulf states, the new participants are Equity Group, United Bank of Africa, Diamond Trust Bank, I&M Bank and Pakistan's MCB.

Three banks - NCBA Group, Absa Bank Kenya, and Co-operative Bank - have exited the scheme.

Deferred payment advantages

In a deal struck in March 2023, Kenya negotiated deferred payment terms with the Gulf states oil producers in a scheme that typically extended the payment period from 30 days to up to six months after delivery.

The L/Cs reflect these extended payment terms, indicating the agreed-upon deferred payment period.

Trust and Security:

The use of L/Cs builds trust between the Kenyan importers and the suppliers, Saudi Aramco in Saudi Arabia and Abu Dhabi National Oil Company (Adnoc) in Abu Dhabi, as the payment is backed by reputable financial institutions.

These arrangements aim to ease Kenya's demand for US dollars, thereby stabilising the Kenyan shilling and ensuring a steady supply of fuel in the country.

Mutual benefits

The use of L/Cs therefore allows Kenya to manage its foreign exchange reserves more effectively by deferring payments. It also ensures a steady supply of hydrocarbons, essential for the country's energy needs.

Meanwhile, Saudi Aramco and Adnoc receive payment assurances, reducing their risk and facilitating smoother trade operations.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.