Unlocking local currency lending: Foreign exchange risk in agricultural finance

The twelfth briefing note from the Initiative for Smallholder Finance suggests that, if used correctly, philanthropic investment can play an influential role in mitigating FX risk.

Though not often discussed in global conversations on the smallholder farmer financing gap, the challenge of managing foreign exchange (FX) risk is a critical issue facing finance managers who provide financial services to farmers. FX risk affects the availability and affordability of credit for smallholder farmers because lenders with foreign currency funding limit their local currency exposure by restricting the types of financial products they offer and the volume of capital they make available

This briefing explains that donors can play an influential role in mitigating FX risk by:

1. Overcoming limited institutional expertise in FX management 
2. Supporting individual agricultural lenders on a bi-lateral basis 
3. Developing currency-focused risk guarantees 
4. Creating local currency notes and adapt other proven currency solutions

This briefing outlines the particular challenges of FX management in agriculture and profiles the landscape of existing solutions, including recommendations for how lenders, donors, and other partners can develop interventions that will help mitigate these FX risks in the short to medium term.