UDB Currency Risk-Sharing Facility
In the face of rising climate risks, Uganda must mobilize more than USD 28 billion by 2030 to meet its adaptation and mitigation goals. Yet climate finance remains far below what is needed from both domestic and international sources, across the public and private sectors.
For the Uganda Development Bank (UDB), closing this gap is further constrained by high domestic funding costs, and UDB’s 12% statutory lending cap makes it difficult for UDB to provide long-term, affordable local-currency financing. While international concessional funding is available, hard-currency borrowing exposes UDB to exchange rate risk, reducing affordability when the local currency depreciates. UDB also has limited options to manage this risk, as traditional hedging instruments are often too costly or unavailable for EMDE currencies at the long maturities required for climate projects.
A first-of-its-kind Currency Risk-Sharing Facility (CRSF)
To address this, the UDB, through the FiCS Innovation Lab, has designed the Climate Risk-sharing Facility (CRSF) to mitigate currency risk within its Climate Finance Facility (CFF) and scale affordable lending for green projects. A first-of-its-kind innovation, the CRSF was developed with technical support from CPI, the University of Leeds, and City St. George’s University of London. The instrument expands long-term local-currency lending while protecting UDB’s capital adequacy and unlocking balance sheet capacity.
While designed specifically for UDB, this instrument serves as a scalable blueprint for other public development banks (PDBs) across emerging markets facing similar foreign-to-local currency mismatches.
Key insights
The incubation of the CRSF through the FiCS Lab yielded the following insights:
- Context-specific FX guarantees can improve capital –efficiency of NDBs by reducing reliance on conventional hedging instruments and helping mobilize greater climate finance.
- The CRSF incubation explored how international financial institutions that lend to UDB can provide FX guarantees alongside lending to deploy capital more efficiently.
- Modeling suggests that large local currency depreciations exceeding the proposed threshold for guarantee activation are relatively infrequent, supporting the viability of the guarantee structure.
- Uganda’s positive economic growth outlook and evolving financial sector provide an immediate testing ground for the CRSF, enabling implementation of the instrument pilot.
Read the full report to discover how these findings pave the way for a scalable approach to currency risk sharing to increase climate finance in emerging markets.
