Facilities for local currency financing in blended finance for agriculture
Most farming in developing countries generates local currency revenue. As much as 90% of the unmet financing needs in agriculture is among these producers (in contrast, producers of cash crops receive much of the finance they need from buyers, and also have relatively favourable access to commercial credit). These producers normally need loans in local currency. But even if banks and others were more willing to finance them, local capital markets are often weak, with (compared with international markets) a dearth of longer-term loans and high interest rates. Using hard currency to make loans that are then reimbursed is risky, not just because of exchange rate risk, but also because governments may make it difficult to exchange local currency back into hard currency and send it abroad. There are solutions to both problems – for example, currency hedging and political risk insurance. But these solutions cannot immediately be applied to agricultural loans – some further structuring is necessary. The conference will discuss how blending techniques can make it possible to make hard currency funding available to farmers who sell in local markets.