Promoting development with the support of local capital markets
News from 2018-04-16 / KfW Development Bank
AfDB and OPIC: two new investors for the African Local Currency Bond Fund
The African Local Currency Bond Fund (ALCBF) founded by KfW has received additional support. In the future, the African Development Bank (AfDB) and the US Overseas Private Investment Corporation (OPIC) will contribute to the fund, which promotes local capital markets. While OPIC is investing USD 40 million, AfDB is contributing ZAR 140 million. This means that the ALCBF will also partly consist of local currency for the first time ever.
The relevant agreements were signed during a conference on local capital markets at KfW Group in Frankfurt am Main. Dr Joachim Nagel, member of KfW Group’s Executive Board, praised the commitment of both financial institutions and emphasised that supporting local capital markets is now an absolute necessity in order to facilitate development and to meet the Sustainable Development Goals defined by the international community.
It became evident at the conference that even a euro- or dollar-based loan with a "favourable" interest rate is by no means always advantageous for a company in a developing country with revenues in the local currency. If the developing country’s currency depreciates against the hard currency during the loan term, repayment in local currency becomes more expensive. The ALCB Fund aims to counteract this effect. It stems from an initiative of the G20 and was established by KfW on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ). Its aim is to reduce dependence on foreign currencies in developing countries and to stimulate investment in local currency.
To this end, the ALCB Fund invests in bonds used by local banks, microfinance institutions (MFIs) and companies to refinance themselves in local currency. The banks and MFIs will therefore be in a position to pass on low-cost loans in local currency to their customers like small farmers, tradesmen or ordinary businesspeople. Local companies can offer their products and services at a lower price, as there are no additional costs for their loans in a devalued local currency. Experience shows that every US dollar invested by the ALCB Fund in local currency bonds triggers seven times the investment by local institutional investors. "The volume of the fund, which will soon total around USD 200 million, will generate investments in local currency of around USD 1.4 billion in the long term," Dr Nagel emphasised. To date, the ALCB Fund has invested more than USD 80 million in 29 bonds across 14 African countries. In addition, the fund invested in the first Corporate Green Bond in South Africa in March this year.
The conference on the importance of local capital markets for development was attended by numerous representatives of financial institutions, development organisations and ministries. These included Dominik Ziller from the BMZ, Ludger Schuknecht from the Federal Ministry of Finance, Jingdong Hua, Treasurer of the International Finance Corporation (IFC), and Nick Dyer, Director General of the UK Department for International Development (DFID). IFC and DFID were among the first investors in the ALCB Fund last year.