In November 2024 the Ghanaian cedi reached an all-time low against the United States dollar, after losing roughly 40% of its value over the preceding two years and joining 23 other African currencies in a similarly challenging position.  

These numbers don’t fully capture the impact of this change. For distant funders, a currency crisis appears as a spreadsheet adjustment, yet for the organizations doing the work it is a very real threat to survival.

Below, we explore how currency (FX) risk might be distributed differently between funders in developed economies and local organizations working in the field. The tools to redistribute this risk exist but remain underused; this piece explores how funders can build them in by design.

The asymmetry at the center of cross-border social finance

Grant, loan and equity instruments where capital is moving across boarders all share a common feature. Capital is raised and reported in hard (strong) currencies, while operations, revenues, repayments, and impact are denominated in local currencies prone to devaluation. The default arrangement places the risk entirely on the local organization — whether it is a borrower repaying a loan, a business paying investors a share of its revenue, or a grantee funded in one currency who needs to pay costs in another.

This arrangement is sometimes hidden behind what is described as “patient capital,” a phrase which implies the funder has high tolerance for long horizons and uncertain returns. However, "patient capital" often means patience with someone else carrying the FX risk. The reality for the local actor is that accepting hard currency funding quietly transfers the currency risk to an organization that has neither the team to manage it nor the balance sheet to absorb the loss. The funder, by contrast, sits inside an institution that holds reserves in stable, easily traded currencies, has relationships with the currency-trading desks of global banks and can purchase political risk insurance from specialized insurers against losses tied to political events. They can also participate in pooled facilities whose entire purpose is to absorb precisely this risk.

This is not a question of one party behaving badly toward another. It is a question of who is better resourced and better prepared to manage currency risk. The local actor receiving capital in hard currency is, in effect, insuring the funder against devaluation for free, and doing so out of a balance sheet that was never built to carry that exposure.

The real impact of currency risk

Consider a four-year USD loan to a Kenyan microfinance institution. The institution then lends the funds to women-owned small businesses, in local currency, at a rate at a rate designed to cover funding costs, operations, expected losses, and a small margin. On the day the loan is made, the funder converts the dollars into Kenyan shillings at that day’s exchange rate. But every repayment is owed in dollars while the exchange rate continues to move. If the shilling loses 20% of its value over the life of the loan, the loan effectively becomes more expensive for the institution by an amount that has nothing to do with how well it is run, how reliable its borrowers are, or the results it delivers.  

The same thing happens, with small variations, when payments are a share of local-currency revenue but capped in dollars, or when an investor’s eventual stake is valued in dollars no matter how well the local enterprise has done in its own market. The organization can perform well and still default, or have the value of its business marked down for reasons that trace back to monetary policy decisions made abroad.

Funders sometimes treat currency risk and operational risk as interchangeable. Furthermore, when they do take steps to protect against currency risk, they sometimes behave as if this will address operational risk as well. It won’t. Operational risk reflects challenges in the work itself: revenue volatility, regulatory change, execution failure, or falling demand. Currency risk is more mechanical and cannot be managed through better performance. A perfectly executed program in Argentina during the 2002 collapse produced a fraction of its dollar-equivalent output, not because anyone underperformed but because the peso fell against the dollar by more than 70% in a few months. Currency risk is the part of the funder-side experience that the local actor cannot influence by operational excellence and cannot insure against by any conventional means available.  

Building the hedge into the vehicle

The tools to correct this imbalance already exist, operate at scale, and remain underused.  

The simplest solution is to lend in local currency so that the local actor never sees the foreign-exchange risk on its balance sheet. This is the model behind the International Finance Corporation’s local-currency lending programs, in which bonds issued in currencies like the Indian rupee or Chinese renminbi are sold to foreign investors who knowingly take on the currency risk themselves.

Hedging and non-deliverable forwards (NDFs)

When lending in local currency isn't possible, the funder can instead buy protection against the currency losing value (a practice known as hedging). The funder pays a known cost to lock in the exchange rate, protecting the borrower from future depreciation. For currencies that are traded widely against major currencies like the US dollar such as the Kenyan shilling, this protection is cheap, transparently priced, and it's small enough relative to the size of the loan that it should be standard practice. It gets harder for the currencies of smaller or less stable economies, where the financial markets that would normally provide this protection barely exist.  

Some currencies can't be freely traded or converted at all ("non-deliverable" currencies) because the country's own rules forbid moving the currency across its borders, such as Indonesia's rupiah and Brazil's real. In practice this means that when an investor uses a financial contract to protect against the currency falling, the contract is settled in dollars rather than in the local currency, because that currency legally can't be handed over. Unless you work directly in these countries you may never encounter the problem, but with nearly 400 million people living in Indonesia and Brazil alone, it matters a great deal for development. A standard solution here is a non-deliverable forward (NDFs): a contract that pays the difference between an agreed exchange rate and the rate that ultimately occurs in dollars, so neither side ever has to deliver the restricted currency.  

Political risk insurance

In environments with a risk of a government seizing assets, freezing money in the country, or blocking it from being converted to another currency, political risk insurance can be used to cover the loss directly. The US government's Development Finance Corporation, for example, offers this cover to investors working in lower-income markets, taking on a type of risk that ordinary currency protection isn't designed to handle.

Risk-bearing capital

In blended finance, a "first-loss" arrangement ensures that money from donors or development funds sits underneath the commercial money and takes the initial hit if the currency falls, which keeps borrowing costs manageable for the local organization while making it clear, and deliberate, who is carrying the risk.  

Private banks use similar approaches to share currency risk rather than remove it entirely. Here, some of the risk is built into the loan terms: the borrower is shielded from large drops in the currency, while the funder accepts a defined amount of risk in exchange for a better return when the currency holds steady.  

What the evidence shows

There is a strong case for intentionally designing for currency risk rather than treating it as an inherited cost. The Currency Exchange Fund, set up in 2007 by a group of development finance institutions and donors, today holds USD 1.8 billion in capital and supports hedging across more than 140 currencies in over seventy countries. Through end-2023 it had helped clients raise more than USD 10 billion in local-currency funding and passed USD 5.8 billion of that currency risk on to private investors willing to hold it, showing that even hard-to-trade currencies can be packaged into something investors will buy. MFX Solutions does much the same thing for the microfinance and impact-investment world, offering protection without requiring collateral from borrowers, which has supported around USD 5 billion of impact loans across more than 55 currencies. The EU’s microfinance hedging facility expects a more than tenfold mobilization ratio, suggesting that these facilities have moved from niche interventions to proven instruments operating at meaningful scale. The infrastructure exists, the pricing is increasingly transparent, and the precedents are documented in the public materials of these institutions.  

At the retail end of the market, Kiva offers its Field Partners a choice between a model in which the partner absorbs the first 10% of currency risk and a model in which 100% of the currency risk passes to retail lenders. This is a public acknowledgement that, in Kiva’s own words, large currency fluctuations can be catastrophic. The value of the Kiva architecture is not that it solves the problem but that it makes the risk transfer visible at the level of every individual loan, surfacing a question that institutional impact funders have generally been able to keep below the waterline.  

Currency risk should be a negotiated design choice, not an invisible default. Making it explicit creates new possibilities for pricing, accountability, and more equitable partnerships.

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