A letter of credit (L/C) deal has prompted Kenya's courts to decide to change the way the date on which exchange rates are calculated is decided.

The decision appears to favour traders rather than the banks that handle L/Cs or other forms of trade finance for importers and exporters.

Trader's risk

Historically it has been Kenyan banks and not the country's traders that have controlled what exchange rate should apply to transactions.

Traders, however, grew unhappy over the way banks could determine the date on which to record in a customer's account that it had made or received payments on behalf of a client.

This unilateral decision by the banks has affected the exchange rate applied to a transaction, often to the detriment of the consumer.

Banker's risk

Now this appears to have changed in favour of bank customers. This follows a decision by the Court of Appeal to uphold an earlier High Court ruling that fixed the applicable date - and the prevailing exchange rate to be used - on the day of the payment to the supplier by a foreign bank acting on behalf of a local bank.

The judgment may expose banks more to currency fluctuations, since they will now have to absorb additional costs arising from currency fluctuations, whereas in the past these were passed on to customers.

L/C case

The judgment arose out of a long running case that started in 1996 and was only concluded in December 2007.

The dispute centred on an irrevocable L/C opened by Omega Chemical Industries with Barclays Bank of Kenya.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.