Local / Foreign Currency Loans

The choice of whether to borrow in local or foreign currency is complex. The borrower must consider several factors, including, but not limited to, the laws of the country where the borrower is located (which may limit or prohibit hard currency borrowings, or impose other obligations or taxes that increase the costs of hard currency borrowings). As a general rule, borrowing in local currency is recommended when the borrowed funds will be caused for re-lending in local currency, and when loan repayment will be funded primarily through local currency revenues. Borrowing in local currency enables the borrower to avoid the risks of currency devaluation and exchange control restrictions that may limit the availability of hard currency with which to make interest and principal payments.
Conversely, borrowing in a foreign currency entails these risks, unless the risk is other-wise mitigated, and should be done only after careful consideration.5 Addressing these risks may require a more complex loan structure and, hence, more sophisticated debt management expertise within the borrowing MFI.