African Local Currency Bond Fund

African Local Currency Bond Fund

Project Overall Goal

Address key market constraints and catalyze climate-related investment in the Southern Africa region.

Executive summary

The ALCB Fund is the largest local-currency bond fund in Africa and a unique player in capital market development. It promotes financial stability and economic growth through deepening domestic capital markets to increase finance available for economic development and build resilience against international capital flow shocks. It was established in 2012 by the German development bank, KfW, following the G20 Action Plan on the Development of Local Currency Bond Markets (LCBMs). After two years of operation, KfW scaled the fund and hired a formal fund manager, Lion’s Head Global Partners (LHGP), whose mission was to implement an institutional upgrade and grow the Fund to beyond USD 100 million. Fundraising efforts focusing on attracting equity and senior debt partners started in 2017. Currently, the total fund commitment is USD 170 million. Equity is contributed through paid-in share capital; shares are redeemable long-term but take a first-loss position, and their earnings are reinvested in the capital base. Senior loan tenors range from 4 to 10 years and offer a semi-annual coupon. The terms of each investment are negotiated individually.

The establishment of the ALCB in 2012 followed on from the G20 Finance Ministers and Central Bank Governors endorsed action plan to support the development of local currency bond markets, which acknowledged the frequent inefficiency of local currency bond markets in developing countries and the underdevelopment or absence of corporate markets in developing countries. The ALCB also has enabling environment criteria for its investees, which include conducive regulatory environment, including legal frameworks, banking regulation, and currency strength and stability.

ALCB invests across Africa in first-time or innovative (e.g. public listing, longer tenor) local currency financial instruments, including listed or privately-placed bonds and local currency club deals in countries where bonds are not possible. Key investment criteria include:

  • Development sector focus: sectors including financial inclusion, housing, renewable energy, agriculture, healthcare, education
  • Financial position: issuer has evidence of growth over 3 years, sound financial results, healthy capital base
  • Country context: conducive regulatory environment (legal frameworks, banking regulation, currency strength and stability)

The Fund invests primarily in senior notes. Investments are priced to the local market, and the terms are at a minimum USD 100,000 to USD 5 million equivalent, tenor between 3-15 years, fixed or variable coupon. Each investment is made alongside local investors with a minimum leverage ratio of 2 to 1 local capital to Fund. The Fund provides TA both to first-time issuers and issuers new to the bond market, and more experienced issuers. 

Ultimate beneficiaries of all ALCB investments need to be MSMEs and low-income people. Fund investees provide direct lending to over 450,000 people, with proceeds most commonly used for education, housing, and micro-enterprise working capital.

Project Details

Sector:  Climate-resilient infrastructure
Tags:  Africa, Low Middle Income Countries, Mitigation and Adaptation, blended
Source of Capital:  Bilateral, Multilateral & Development Finance Institutions Philanthropy, private donors and impact investors
Project URL:  Download PDF

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