15 September 2026 · 6 min read · Jenifer Tiarry, Sapha Wang
A business in Nairobi, Lagos or Johannesburg is offered two loans. One is in local currency at a double-digit interest rate. The other is in US dollars at a rate several points lower. On a term sheet the dollar loan wins. Over the life of the loan it frequently does not.
Why the headline rate misleads
Interest rate differences between currencies largely reflect expected depreciation. When a business earns in local currency and repays in dollars, every point the local currency falls adds to the real cost of the debt — and to the size of the outstanding balance in local terms. A loan that looked cheaper can end up the more expensive of the two, and can breach leverage covenants without the business borrowing another cent.
Questions to answer before signing
- What share of revenue is earned, or can be priced, in the loan currency?
- What happens to debt service and covenants if the local currency falls 15%, 30% or 50%?
- Is hedging available for the full tenor, and at what cost?
- Would a local-currency tranche, or a lender that offers one, reduce total cost once risk is priced in?
Structuring options
There is rarely a single answer. Natural hedges — export revenue, dollar-linked pricing — can support a share of hard-currency debt. Development finance institutions increasingly offer local-currency lending, sometimes through currency-risk facilities. Blending tranches can bring the average cost down while keeping exposure within what the business can absorb.
The question is not which loan is cheaper today. It is which loan the business can still service after the exchange rate has moved.
Whichever route is chosen, the decision should rest on a model that stress-tests currency, not a comparison of two interest rates.
