Introduction

Development Finance Institutions (DFIs) increasingly recognise that affordable debt financing in local currency (LCY) is a strategic priority. However, providing this financing remains difficult in many emerging and frontier markets. While donor and philanthropic capital have been essential in supporting LCY solutions, these facilities often lack transparency and rigorous evaluation. As donor funding becomes scarcer, there is a greater need for accountability and clarity regarding the structures used. This paper reviews the main donor-backed LCY facilities aimed at supporting private sector borrowers in emerging markets, highlighting that enabling LCY financing is vital for economic development, reaching unserved sectors, and reducing borrower vulnerability to debt crises.

A framework for evaluating donor-supported DFI local currency financing facilities

The paper proposes a purpose-based framework consisting of three criteria for assessing donor-backed LCY solutions. First, a facility must be ‘Broadly viable’, meaning it is capable of operating successfully across various contexts, particularly in the challenging environments of low-income countries (LICs). It must address diverse currencies, market types, tenors, and sector-specific constraints. Second, facilities should ‘Contribute to local capital market development’ by promoting long-term sustainability, avoiding market distortion, and mobilising local capital. Third, the ‘Cost-efficient use of donor funds’ is measured by the ratio of donor funds at risk relative to the supported transaction volume; the paper considers a leverage ratio of 6x or more to be efficient.

Three donor-backed solutions to support DFI LCY finance

The framework is applied to three established structures. The World Bank Group’s IDA Private Sector Window (PSW) Local Currency Facility (LCF) serves 58 countries and allows the IFC to provide long-term LCY financing. It operates through a solutions hierarchy, acting as a ‘last resort’ when market-based options are unavailable. Between 2017 and 2025, it supported 79 projects, with 22% of investment volume in LICs and 78% in lower middle-income countries (LMICs). However, its average transaction leverage is 2.7x, and it requires high capital reserves, with IDA reserving $1.2 billion for potential losses in 2023.

The TCX EU Market Creation Facility utilised an unfunded €20 million guarantee for a €120 million portfolio, achieving a target leverage ratio of 6x. Using an auction process to select lenders and ensure minimum concessionality, the facility supported 68 trades with 34 investors in 14 currencies across 17 countries. Approximately 41% of its volume was directed to LICs. Finally, the EBRD SME Local Currency Programme uses donor-funded first-loss risk coverage to reduce loan margins for SMEs. In 2024, EBRD reported that $60 million in donor funding enabled $710 million in financing, indicating a high leverage ratio of approximately 8x. The programme explicitly links financing to policy dialogue via the Money Market Diagnostics Framework (MMDF).

Nascent LCY finance facilities

Two emerging structures are also examined. Project Delta is a proposed onshore FX hedging platform designed to warehouse short-term LCY funding locally and swap it for MDBs and DFIs on a long-term basis. This approach seeks to eliminate transfer and convertibility risk premiums. It also includes a pillar for policy dialogue to improve local money markets. Eco Invest Brasil, launched in 2024, is a BRL27 billion (approximately $5.2 billion) programme supporting Brazil’s Ecological Transformation Plan. It offers blended finance loans with tenors up to 25 years, contingent credit lines for firms with hard currency debt, and a derivatives pipeline to connect international markets with Brazilian financial institutions.

Key findings and policy considerations

Serving LICs remains very challenging due to high FX volatility, small private sector bases, and a lack of government benchmark curves. Donors should encourage facilities with a broad focus rather than an exclusive focus on specific segments like SMEs, as this allows for greater scale and competition. Efficient leverage of donor resources requires regular monitoring of risk assumptions and market conditions. Finally, donors should encourage local capital market development more explicitly in facility design. Moving away from a ‘transaction to transaction’ approach towards an integrated one is essential for long-term sustainability. Coordination between stakeholders, including central banks and finance ministries, is key to building the trust and infrastructure necessary for functional local markets.