AfDB Board Adopts Framework for Bank Lending in Local Currencies
Tunis, 24 July 2006 – The Board of Directors of the African Development Bank (AfDB) has approved a policy framework for providing loans denominated in the currencies of its regional member countries. The framework provides the basis on which decisions will be made from time to time to designate any particular currencies as lending currencies.
The main rationale for the provision of financing in local currency is to reduce the exposure of borrowers to foreign exchange risk, particularly as many projects have expenditures and revenues denominated in local currency.
"By providing local currency finance which may necessitate local currency bond issuance, the Bank will also be contributing to the development of local bond markets by establishing reference benchmarks, encouraging best practices and catalyzing a virtuous cycle of long-term savings and development," said a senior Treasury official.
It is also expected that local currency bond issuance by the Bank will reinforce efforts by local authorities to widely disseminate international best practices with respect to financial instruments such as: listing, settlement, rating, clearing, transparency and risk management.
The resulting benefits to the capital market are consistent with the Bank’s role as lead agency under NEPAD for the dissemination and application of international standards and best practices for the financial sector.
The South African Rand (ZAR) is currently the only regional member country currency on the menu of the Bank’s approved lending currencies. Introduced in 1997, Rand borrowing has been especially successful, making the ZAR the AfDB’s third largest lending currency. The Bank currently has a full treasury operation in the Rand.
In December 2005, the Bank issued its first Botswana Pula denominated bond with a maturity of one year, followed in February 2006 by a bond issue linked to the Tanzania Shilling. The Bank has also supported other local currency operations using non-lending instruments. It backed a CFA Franc private sector loan by extending a guarantee to cover the borrower’s debt service and repayment obligations to local banks. The Bank also recently approved a partial credit guarantee facility in Kenya which provided partial guarantees for loans denominated in Kenya Shillings provided by local banks to women entrepreneurs.