The China-led Asian Infrastructure Investment Bank (AIIB) is in the process of launching pilot projects in five member countries to start local currency lending to clients from the private sector. 

“It’s a demand-driven programme,” AIIB chief financial officer Thierry de Longuemar said at the bank’s annual meeting in Luxembourg. “There is a big demand for local currency financing, particularly for infrastructure projects, where revenues are generally generated in local currency. These are complex operations because often domestic financial markets are in a phase of development. For this reason, we want to start pilot programmes working with the Indian rupee, the Indonensian rupiah, the Russian ruble, the Thai baht and the Turkish lira. 

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Development finance institutions are increasing their focus on local currency lending to spare borrowers any foreign exchange risk and contribute to the deepening of local financial markets. The European Bank for Reconstruction and Development, which focuses on private sector lending in transition economies in Europe as elsewhere, signed 722 loans denominated in 26 local currencies for a total project value of €12.4bn as of January 2018. 

The AIIB is thus planning to raise its local currency game to make the life of borrowers easier against a backdrop of increasing criticism for the alleged debt trap attached to Chinese-sponsored projects often developed within the framework of the Belt and Road Initiative. 

“We plan to have a likely first transaction through a currency swap with a commercial bank in 2019, hopefully followed by a few others in 2020,” said Mr de Longuemar. He added that many financial markets in Asia other than the five singled out for the pilot phase of the programme are not viable options yet for local currency development finance as they often lack liquidity, regulation and derivative instruments.