UDB Currency Risk-Sharing Facility Instrument Design Report

The Uganda Development Bank (UDB) has designed a Currency Risk-Sharing Facility (CRSF) to scale up local-currency climate lending through its Climate Finance Facility (CFF). Developed via the FiCS Innovation Lab with technical support from the Climate Policy Initiative, the University of Leeds, and City St. George’s University of London, the CRSF aims to reduce foreign exchange (FX) exposure for UDB when borrowing in hard currencies (USD/EUR) and on-lending in Ugandan shillings (UGX). The instrument employs a layered risk-sharing approach, combining partial hedging with a tail-risk FX guarantee to protect against severe UGX depreciation while remaining more affordable than full hedging.

• The CRSF is designed to distribute currency risk among three parties: a traditional or development-oriented FX hedge provider (such as TCX), the Uganda Development Bank, and a guarantor (a donor or development finance institution). UDB uses a conventional hedging instrument, like a currency swap, for a portion of its foreign currency liability and absorbs moderate currency risk for the remainder, while the guarantor covers losses if depreciation exceeds a predefined dynamic threshold.
• Financial modeling indicates that the CRSF provides a middle-ground solution for funding costs compared to unhedged and fully hedged scenarios. The CRSF's average funding cost is 9.82% with a spread of 4.38% to 12.11%, which is more stable than the unhedged scenario (8.39% average, -5.52% to 20.12% spread) and more affordable than the fixed cost of full hedging at 10.96%.
• The instrument is structured as a symmetrical 'collar' to ensure financial sustainability; while the guarantor protects UDB against extreme depreciation, UDB transfers gains to the guarantor if the Ugandan shilling appreciates beyond a predefined threshold (e.g., 5%).
• Preliminary modeling and back-testing suggest the risk of extreme depreciation is relatively low. Large depreciations exceeding the proposed threshold occur in Uganda on average once every seven years. Back-testing from 2000 onwards indicates the guarantor would have been profitable in all years except for deals initiated in 2007 and 2009.
• Legal analysis concludes that because the CRSF involves reciprocal contingent payment obligations (both protection against depreciation and sharing of appreciation), it does not fit the strict legal category of a guarantee. Instead, it is characterized as a derivative, specifically an option collar, and would most appropriately be documented using an ISDA Master Agreement.
• The CRSF is intended to be replicable for other public development banks in emerging markets and developing economies that face high domestic interest rates and limited hedging options. Key adaptable elements include depreciation thresholds, the share of hedged versus unhedged exposure, and the size and tenor of the credit line.

APA

Peres, T., & Yahmed, Z. B. (2026). UDB Currency Risk-Sharing Facility Instrument Design Report. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2026/05/UDB-Currency-Risk-Sharing-Facility.pdf

Chicago

Peres, Taarika, and Zeineb Ben Yahmed. UDB Currency Risk-Sharing Facility Instrument Design Report. Climate Policy Initiative, 2026. https://www.climatepolicyinitiative.org/wp-content/uploads/2026/05/UDB-Currency-Risk-Sharing-Facility.pdf.

Wikipedia

{{cite report |last1=Peres |first1=Taarika |last2=Yahmed |first2=Zeineb Ben |title=UDB Currency Risk-Sharing Facility Instrument Design Report |publisher=Climate Policy Initiative |date=2026 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2026/05/UDB-Currency-Risk-Sharing-Facility.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{peres2026udb, author = {Peres, Taarika and Yahmed, Zeineb Ben}, title = {{UDB Currency Risk-Sharing Facility Instrument Design Report}}, institution = {Climate Policy Initiative}, year = {2026}, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2026/05/UDB-Currency-Risk-Sharing-Facility.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }