Dhaka Bangladesh, 2013.
Kamal is driving back to his office on the outskirts of Dhaka, the capital of Bangladesh. He has just visited his account officer at BRAC Bank. Three years ago he took over his father’s construction business and after a rocky start the future looks much brighter.
In his first year, orders had been slow following the economic downturn. Worse still, the business had been struggling to repay a loan his father had taken out in US dollars. He remembers discussing that loan with his father and how happy they had been with the low interest rate. However, in December 2011 there was a 13% devaluation of the local currency (the Bangla Desh Takka) against the US Dollar, leading to an increase in the cost of the loan in their own currency. It happened at the worst possible time and almost wiped out the business. It took all of 2012 to regain a foothold and regain the bank’s trust.
Things were now much better. The economy was growing and business was picking up. He was just finalising a contract for the construction of a small business centre, including a supermarket, fashion retailer and drugstore. It was a huge opportunity for Kamal, his business and the three trusted employees he’d been able to retain through the hard years. There was even the possibility of rehiring some of the old hands he’d let go. However, the job required the purchase of a truck and this was why he was visiting the bank: for the first time since 2012, Kamal was ready to take out a loan.
It felt good to visit the bank again. Kamal had clearly regained their confidence thanks to his competent stewardship of the business and prudent management of his personal and business finances. Better still, the bank now also offered vehicle term leases in Takka, instead of US dollars; something of a novelty for Kamal (and quite ironic given their previous experience).
The bank didn’t know that he’d already saved up a sizeable financial cushion in case of a new currency crisis, having assumed that his only lending option would again be in USD. However, by getting the loan in Takka, he could release that cushion and pay the year’s school tuitions without stress. He was excited about this and could hardly wait to tell his wife and kids the good news!
Entrepreneurs need to borrow money in order to expand their businesses and manage growth. But in developing countries, funding from banks or microfinance institutions often is sourced from international capital because the local financial system is not deep enough.
Lending from international sources is largely unavailable in local currencies, because investors cannot absorb the currency risk and hedging isn’t available in illiquid currencies. As a result, entrepreneurs are typically funded with USD or Euro debt, even though their income remains in the local currency. This leaves them vulnerable to local currency devaluations, which can drastically increase their liability, potentially leading to bankruptcy.
TCX was created to address this problem by providing currency hedging to international investors and local financial institutions. This meant that loans to entrepreneurs could be provided in their home currency. Eight years since it started in 2007, TCX now provides around USD 1.2 billion of hedging to over five hundred financial institutions in fifty different national currencies. Cambodia, Tanzania, Kyrgyz and the Dominican Republic are just a few of the countries where they operate.
For example, the BRAC was established as one of the world’s first large-scale microfinance lenders. The idea was to create new jobs and to increase personal and family income by strengthening microenterprises with loans. To fund its growth, BRAC regularly sources international term loan funding in local currencies to MSMEs that do not generate hard currency. As hedges for tenors beyond a few months are not available, BRAC’s international lenders hedge themselves against currency risks with TCX.