New foreign currency hedging facility to enable local currency lending to agricultural businesses in Sub-Saharan Africa

FOR IMMEDIATE RELEASE

Berlin (Apr. 13, 2017) – The German Development Bank KfW has announced the launch of a new foreign currency hedging facility to enable lending to agricultural businesses in Sub-Saharan Africa in local currencies. Intended as a stop-gap measure during periods of heightened currency volatility in local African markets, the trust is already in use by one of KfW’s agricultural investment facilities, LAFCo – the Lending for African Farming Company – to unlock lending to small and medium enterprises (SMEs) working in domestic and food crop value chains that promote food security and nutrition on the continent.

“Lending to African companies in local currency is prohibitively costly at the moment. However, hard currency is often no option for a responsible lender. We therefore need an instrument to bring down excessive hedging costs” said Dr. Johannes Feist, Head of Division, for KfW.

Agriculture accounts for 65% of Africa’s workforce and produces the majority of the food consumed on the continent, but the sector remains dramatically underfunded. Already, Africa imports an estimated $35B annually in food staples while the demand for food is only growing – by some estimates doubling by 2050. This presents both a challenge and an opportunity for local African agricultural businesses focused on domestic production – exactly the type of enterprise that LAFCo is seeking to finance. Unlike exporters of cash crops such as coffee and cocoa, businesses selling food into local markets require credit lines in their domestic currency. While local and regional commercial banks meet some of this credit need, an estimated 90% of SMEs lack access to sufficient credit while surveys of small businesses consistently cite lack of financing as their single biggest barrier to growth. International banks and non-bank financial institutions may fill some of this demand, but these international lenders are rarely able to control the foreign exchange risk necessary to lend in local currencies. This reality is further heightened in periods of significant currency volatility such as we have seen in many of LAFCo’s target investment countries throughout Sub-Saharan Africa.

KfW’s €2.37M Local Currency Support Trust is a stop-gap solution to help unlock local currency lending for LAFCo’s $22M working capital fund. It is designed to ensure that LAFCo loan pricing remains risk and market-based while providing strong protections against any undercutting of local capital markets. In this way, LAFCo seeks to provide additional capital to agricultural SMEs that local commercial banks are unwilling or unable to serve. The Local Currency Support Trust was launched in January, 2017 and to date LAFCo has leveraged the facility to extend a 2 million Ghanaian Cedi loan to a Ghanaian food processor which sources maize and soy from smallholder producers across the country and then processes, packages, and markets nutrient enriched food products locally.

###