New at Lendahand: Financing SMEs in their Local Currency
Written by Koen The on 19 July 2021
In addition to investments in Euros (EUR) and U.S. Dollars (USD), Lendahand is adding a third opportunity to our portfolio: investing in the SMEs local currencies. This new addition increases the access to financing for entrepreneurs in emerging markets without adding currency exchange risk for you.
Why are we adding investments in local currency?
In emerging markets, the economy and local currency are often unstable and vulnerable. As a result, the currency value frequently fluctuates against the euro, increasing the exchange rate risk when providing financing in euros. It can fluctuate so strongly that entrepreneurs can incur substantial losses if the local currency suddenly falls against the euro, as interest expenses and repayments then rise. These currency fluctuations create additional uncertainty and risks in the business operations of entrepreneurs. One solution is to offer financing in the same currency as the entrepreneur's income and expenditure.
Investing in a project held in the entrepreneur's local currency doesn't add risk for investors, as the exchange rate risk is hedged by a currency hedge contract between the Lendahand FX Foundation (a foundation set up especially for this purpose) and The Currency Exchange Fund N.V. (TCX). The contract makes sure potential fluctuations and depreciation in the entrepreneur's local currency against the euro don't result in losses for the investor or the entrepreneur. TCX covers the full exchange rate risk.
This is the first time TCX partners with a crowdfunding platform like Lendahand. The German development bank KfW minimizes the risk TCX takes by guaranteeing potential credit losses on the currency exchange in case an entrepreneur defaults. In case of a default, the KfW will pay the credit loss on the currency exchange to TCX. To make this possible, KfW is financially supported by the German Ministry of Environment, BMU.
What this means for you:
Making investments in local currency projects work largely the same as our Euro projects. However, as an impact investor, you will create even more positive impact for entrepreneurs in emerging markets because the funding they receive no longer exposes them to exchange rate fluctuations. Read here on our currencies page how this works
Currency Exchange and Interest Rates
In the case of financing in a local currency, the entrepreneur's interest rate usually is higher than that of funding in euros. This higher interest rate only serves as compensation for hedging the currency exchange risk through the currency hedge contract with TCX and does not mean a directly higher interest rate for the investor. With their activities, TCX aims to achieve a marginally positive result.
TCX defines the interest rate based on the currency exchange risk the Lendahand FX Foundation and TCX take when concluding the currency hedge contract. The rate depends on three elements: the currency, the maturity of the project and the euro interest rate Lendahand has agreed upon with the entrepreneur.
Ultimately, an entrepreneur has two possibilities. He can choose for financing in euros with lower nominal interest but with the corresponding exchange risks and insecurities, or choose for financing in local currency at a higher nominal interest, without risks and with predictability.
For every form of financing, special conditions apply. Read more in our FAQ.
Expect the first local currency project later this week. If you have questions in the meantime, don’t hesitate to email us at email@example.com
What does TCX do?
TCX is a Netherlands based development finance institution that was established to ensure that international financing flows into developing countries can be provided without exposing providers and recipients to exchange rate risk. TCX achieves that by offering currency derivative contracts to international lenders allowing such lenders to denominate loans in the local currency of their borrowers. To offer this service in a financially sustainable fashion, the TCX model is designed to generate a marginal profit. TCX is a professional hedge provider that is regulated by the Dutch financial sector supervisors AFM and DNB. The fund is supported by several European governments, including the Dutch government, and a wide range of development finance institutions active worldwide. TCX started operations in 2007 and has since gradually expanded. TCX’s creditworthiness is rated as good and stable (“single A”) by the rating agency S&P. For more information: see this link for the latest S&P report and visit the company website: www.tcxfund.com.