KCB Group has scaled down its participation in Kenya’s Government-to-Government (G-2-G) Oil Import Deal by surrendering 30 percent of its share in the payment facilitation structure. The move is a proactive effort to manage risk and safeguard the bank’s financial health amid an increasingly complex economic environment.
The KCB Group G-2-G Oil Import Deal has been a key pillar of the government’s initiative to stabilize fuel prices and ease pressure on foreign exchange reserves. Under this arrangement, the government sources petroleum products directly from state-owned firms in oil-rich nations, particularly Saudi Arabia and the United Arab Emirates, on deferred payment terms, with commercial banks like KCB playing a critical role in financing and guaranteeing the transactions.
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However, KCB’s decision to reduce its exposure to this framework comes in the wake of a significant drop in customer deposits, which shrank by 18.4%—from Sh 1.7 trillion in December 2023 to Sh 1.4 trillion by the end of 2024. Customer deposits are vital for bank liquidity and loan issuance, and a Sh 300 billion decline raises red flags over tightening market conditions, potential customer sentiment shifts, and increased competition within the banking sector.
Understanding the G-to-G Oil Deal
The Government-to-Government (G-2-G) oil deal is an arrangement where one government directly procures oil from another government or its state-owned entities, bypassing traditional open-market mechanisms such as competitive tenders or private oil firms. In Kenya, the G-2-G deal was launched in early 2023 as a targeted response to mounting fuel supply challenges, surging pump prices, and growing pressure on foreign exchange reserves.
Like many oil-importing nations, Kenya depends heavily on foreign currency, mainly U.S. dollars, to purchase petroleum products. By 2023, the country was grappling with a severe dollar shortage triggered by global economic disruptions, a depreciating Kenyan shilling, and escalating import costs. These pressures caused fuel supply bottlenecks, volatile prices, and dwindling forex reserves at the Central Bank of Kenya (CBK).
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To mitigate the crisis, the Kenyan government introduced the G-2-G oil import framework, partnering with major oil-exporting Gulf nations such as Saudi Arabia and the United Arab Emirates (UAE). Through this arrangement, Kenya negotiates directly with state-owned oil companies like Saudi Aramco and the Abu Dhabi National Oil Company (ADNOC) to secure fuel supplies on deferred payment terms.
The G-2-G initiative aimed to:
- Stabilize Fuel Prices: Locking in supply agreements to reduce exposure to fluctuating global spot market prices.
- Ease Forex Pressure: Allowing deferred payments—typically up to 180 days—so the government does not need immediate access to U.S. dollars.
- Ensure Supply Continuity: Bypassing delays caused by private importers who may struggle to obtain forex or credit.
How the G-2-G Deal Works
Under the G-2-G structure:
- Participants include the Kenyan government (via the Ministry of Energy and Petroleum), foreign state oil companies, and local commercial banks.
- Financing is facilitated by banks such as KCB Group, Equity Bank, and Co-operative Bank, which issue Letters of Credit (LCs) to guarantee supplier payments—often backed by government assurances.
- Deferred Payments allow oil to be supplied on credit, with settlements made months later in a mix of U.S. dollars and Kenyan shillings.
- Distribution of the imported fuel is handled by private oil marketing companies (OMCs) like TotalEnergies, Rubis, and Vivo Energy, who deliver it to the local market at regulated prices.
In Kenya’s case, the arrangement was anchored by three main suppliers—Saudi Aramco, ADNOC, and Emirates National Oil Company (ENOC)—covering approximately 30% to 40% of the country’s monthly fuel demand, estimated at 450,000 metric tonnes.