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Currency exchange funds

Instrument Overview

Currency exchange funds (or FX hedging facilities) allow cities to borrow in foreign currencies—common in international climate finance—to hedge exchange rate risks. These mechanisms fix repayment costs despite currency fluctuations, making capital more predictable and manageable (CCFLA, CPI).

 

Why It Matters for Cities

  • Shields borrowers from exchange-rate volatility
  • Enhances access to global climate finance while stabilizing cost structures
  • Improves fiscal planning and budget certainty
  • Supports creditworthiness by reducing debt-service uncertainty

 

Key Features

  • Can include forward contracts, swaps, or pooled hedge structures
  • May be backed by development banks or dedicated facilities
  • Covers debt denominated in hard currencies (USD, EUR)
  • May impose premium costs based on duration and risk

 

How It Works

  • City secures foreign currency funding for a project
  • Contracts with a hedging provider or fund to fix future repayment rate
  • If local currency depreciates, fund covers the additional cost
  • If currency strengthens, gains may be shared or retained by fund structure

 

Benefits & Challenges for Cities

Benefits:

  • Ensures stable debt service even with exchange volatility
  • Attracts international investors by reducing currency risk
  • Facilitates long-term project financing planning

Challenges:

  • Hedging fees can be substantial, particularly for long-term deals
  • Smaller or low-credit cities may have limited access
  • Requires advisory capacity to structure and monitor exposures

 

Use Case

Currency Hedging for M-KOPA’s PAYG Solar Expansion (Kenya & East Africa)

M-KOPA, a Kenya-based pay-as-you-go (PAYG) solar company, scaled rapidly in the 2010s by combining consumer micro-payments with external investor capital; however, its rapid growth exposed the business to severe currency mismatch risk because large portions of investor financing and some supplier contracts were denominated in US dollars while revenues were collected in local currencies (Kenyan shilling and others). To de-risk investments and make local-currency lending feasible, specialized hedging facilities and partners—most notably The Currency Exchange Fund (TCX)—provided tailored FX instruments (forwards, cross-currency swaps) that effectively insulated M-KOPA (and similar off-grid providers) from sharp devaluations and allowed lenders to extend longer-tenor finance at lower cost. This arrangement enabled M-KOPA to convert international capital into workable local-currency exposures without imposing unmanageable FX risk on the company or its customers, which in turn supported investments in inventory, logistics, and customer financing that reached hundreds of thousands of households across Kenya, Tanzania and Uganda. Implementation required close coordination among M-KOPA, impact investors, local banks, and hedge providers: contracts were structured so that TCX or similar counterparties absorbed currency risk while investor returns were preserved in USD or an indexed currency. Major challenges included hedge pricing and tenor (long tenors are expensive or thinly traded), regulatory complexity across multiple jurisdictions, and the need to standardize reporting so investors could assess residual risk. The achievements were material: currency-risk mitigation lowered the effective cost of capital, improved debt tenors, and helped scale the company’s customer base and installed capacity—directly contributing to energy access and distributed clean energy deployment at city and peri-urban scales. Lessons learned from this type of intervention are clear: (1) pooling FX risk through specialist funds or development-bank facilities can unlock private finance for local green infrastructure; (2) hedge providers must tailor instruments to sector cash-flow profiles; and (3) building local capital market depth (so hedges become cheaper and longer) is essential for sustained municipal and city-level climate investment.

 

When to Use It

  • Project Stage: Financing and construction
  • Sectors: Energy, water, transport, sanitation when funded in foreign currency

 

Reference Links

 

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Authors

Jayashiree Elango Project Manager - FS

Last update: February 25, 2026

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