Image courtesy of Senelec.
By: Chinmay Naralkar, Deputy CEO, GuarantCo, part of the Private Infrastructure Development Group.
Network Voices is a series where Convergence amplifies blended finance opinions and activities from our network.
Credit guarantees are one of the most widely used tools in blended finance transactions, especially in developing and emerging markets. They are essentially a promise to the lender or bond investor by a third party, often a development finance institution (DFI) or government-backed entity, to repay some or all of the money lent or invested if the borrower or bond issuer defaults. To date, Convergence Market Data has recorded 74 blended deals using credit guarantees with an average deal size of $156 million.
In true blended finance form, a guarantee underpinned by public money helps to crowd in private capital, reduce risk, and improve a project’s creditworthiness from a lender or investor’s perspective. Guarantees can transform markets, or even help build new markets, by providing replicable structures that demonstrate to local lenders and investors what is possible. They can also encourage international players to participate in unfamiliar markets through risk sharing.
Guarantees are a critical component of The Private Infrastructure Development Group (PIDG)’s strategy to mobilize sustainable infrastructure finance across many sectors including renewable energy, transportation, digital communications, manufacturing, agriculture, and water. GuarantCo, part of PIDG, has been providing credit guarantees covering loans and bonds since 2005. PIDG’s ownership by six G12 governments: the United Kingdom, the Netherlands, Switzerland, Australia, Sweden, and Canada has enabled GuarantCo to achieve excellent credit ratings of A1 from Moody’s and AA- from Fitch. These external credit ratings are central to its risk transfer offering through the provision of guarantees.
GuarantCo provides most of its guarantees in local currency to reduce financial risks and strengthen the sustainability of investments in emerging markets. In 2025, GuarantCo supported transactions denominated in several different currencies including West African CFA francs (XOF), Vietnamese dong (VND), Iraqi dinar (IQD), Kenyan shillings (KES), and Indian rupees (INR).
The structuring of guarantee instruments in domestic rather than hard currency provides a multitude of benefits, both inside the deal itself and for the wider economy. Critically, a focus on local currency guarantees ensures that currency risk is not transferred to weaker entities (i.e. relatively low rated borrowers in emerging markets).
Mitigating currency risk
If the debt and guarantee is denominated in a foreign currency such as US dollars (USD) or Euros (EUR), local borrowers face the risk of their local currency depreciating, making debt service much more expensive. This has been the general trend observed in many emerging markets, adding a significant layer of risk when it comes to hard currency borrowing. Local currency guarantees protect borrowers from exchange rate volatility and enable more predictable repayment obligations. This is particularly important over longer tenures, which are a common feature of infrastructure financing.
Maintaining financial stability through more predictable debt servicing obligations goes a long way in mitigating default risk, improving the credit profile for both the guarantor and lender/investor.
Mobilizing local capital pools and developing capital markets
DFIs can use local currency guarantees to attract domestic lenders to impact-focused or unfamiliar sector deals that might otherwise be perceived as too risky. Mobilizing capital from domestic lenders is critical in demonstrating what is possible in a specific market. Full or partial credit guarantees can allow local lenders to get comfortable with certain risks, so that eventually guarantees are no longer needed.
Local currency guarantees also help deepen domestic bond markets. When investors know their repayment is partially or fully guaranteed in local currency they are more willing to participate in local markets, improving liquidity and broadening access to finance. Effectively, local currency guarantees can go a long way in mobilizing local pools of risk averse capital towards infrastructure development and the achievement of sustainable impact goals.
Self-sustaining markets and stability
Over time, local currency guarantees can stretch risk boundaries for lenders and investors. This effectively reduces a country’s dependence on foreign currency debt, which can protect their long-term development goals from external shocks. Over-dependence on foreign currency borrowing can amplify economic shocks as witnessed in previous debt crises. Encouraging local currency financing through guarantees contributes to more resilient financial systems and reduces systemic exposure to exchange rate swings.
Blended finance case studies
In the last 12 months, GuarantCo has provided several local currency guarantees to enable highly impactful blended finance deals. In Senegal, a $50 million bond guarantee denominated in XOF was provided to support the national power utility, Senelec, with its transition to renewables. The deal was pioneering as one of the first securitization deals by an African public utility and the first to obtain a dual label of green bond and sustainability-linked bond. The guarantee enabled the investor base to be expanded to European institutional investors operating in EUR by sufficiently de-risking the transaction. The transaction is expected to mobilize further private capital flows into the region by providing a replicable template with demonstrable impact.
In India, a partial credit guarantee denominated in INR was provided for a loan facility from Axis Bank to Chartered Speed to scale its electric bus fleet under a flagship Government of India scheme. The first-of-its-kind transaction provides a replicable and scalable financing model, for future electric bus investments under the scheme. The mobilization of greater private capital will help make it possible to meet India’s urban mobility needs sustainably through electric buses.
Overcoming constraints
On a pragmatic note, local currency guarantees come with structural, market, and institutional challenges that can limit their feasibility and scalability. They are complex, multi-party structures with bespoke risk-sharing arrangements, currency-specific considerations, and regulatory constraints. Guarantee pricing often adds a further layer of cost which must reflect credit risk, currency risk, and tenor. In the absence of clear market benchmarks, pricing can often lead to lengthy negotiations. Moreover, effectiveness of local currency guarantees depends on strong legal and regulatory frameworks, which are often less developed in emerging markets. Finally, while guarantees can reduce risk for lenders and investors, they cannot generate liquidity where none exists. Emerging markets often lack deep capital markets as institutional investors are highly regulated and have strict restrictions in terms of allowable investments.
These constraints should be viewed not as barriers, but as opportunities for continued innovation and progress. Given the multi-faceted advantages that local currency guarantees deliver – particularly their potential for replicability and mobilization of local pools of capital – we must find solutions to overcome these challenges and encourage the use of these instruments.
The use of tools, such as technical assistance (TA) through grants and concessional capital, can help overcome these challenges. TA for capacity building exercises involving key local market participants such as regulators, investors, rating agencies, bankers, and stock exchanges can create the environment for long term development of financial markets through the appropriate use of local currency guarantees. PIDG has demonstrated how the use of these tools can deliver powerful impact across several markets. For example, in Cambodia, PIDG delivered technical training to the Credit Guarantee Corporation of Cambodia to help the organization scale its impact in the provision of local credit enhancement solutions. PIDG has also delivered capacity building workshops in Cameroon, Togo, Malawi, Cote d’Ivoire, Tanzania, and Uganda for local finance and legal professionals to increase understanding of often complex deal structuring and governance.
There is strong support among blended finance practitioners for the increased use of guarantees. As DFIs continue to refine instruments and expand market engagement, and as domestic financial ecosystems mature, the role of local currency guarantees is only set to grow. Combined with broader reforms to deepen capital markets, strengthen legal and regulatory systems, and support the development of institutional investors, these instruments can play a pivotal role in building more resilient, inclusive, and sustainable financial systems for the future.
