Description
Local currency financing involves issuing debt in the currency of the borrower's income, thereby avoiding currency mismatches. Local currency financing can be provided by local financial institutions or by foreign financial institutions, which can then bear or hedge the currency risk.
Benefits
Borrowing in local currency protects projects from foreign exchange risk. Local currency loans reduce the borrower’s risk of increased debt payments in the event of currency devaluation, therefore increasing the project creditworthiness. Beyond being an effective risk mitigation strategy, local currency lending also has co-benefits such as actively contributing to the development of local financial markets by increasing demand for local currency and developing financial products such as local currency bonds and currency swaps.
Case Study
The IFC financing local currency loan to Absa Bank Limited in South Africa
The International Finance Corporation (IFC) partnered with Absa Bank Limited to provide a loan of up to ZAR 4.5 billion (approximately USD 240 million) to support the development of certified green buildings in South Africa.
This local currency loan would help Absa expand its green building financing portfolio, targeting both the residential and commercial sectors, and could offer relatively better loan terms as it didn't have to price the currency risk.
The financing would be used to finance projects certified under IFC's Excellence in Design for Greater Efficiencies (EDGE) programme, which aimed to promote resource-efficient and climate-friendly buildings. The loan also included performance-based incentives funded through the IFC-UK Market Accelerator for Green Construction (MAGC) program, which encouraged financial intermediaries to develop and launch new green building finance products. IFC also provided advisory services to Absa in order to enhance its capacity to manage loans for green building projects.
Additional Sources
- https://www.cardanodevelopment.com/what-is-local-currency-finance/#:~:text=Local%20currency%20financing%20is%20the,of%20depreciation%20and%20avoid%20bankruptcy
- https://treasury.worldbank.org/en/about/unit/treasury/ibrd-financial-products/local-currency-financing
- https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=27691