Financial products and financing terms
Financial products and financing terms
IFAD provides financing through loans, grants and a debt sustainability mechanism
IFAD Lending Terms
Lending terms are determined in accordance with the Policies and Criteria for IFAD Financing, primarily based on a country's gross national income (GNI) per capita (as per World Bank calculation using Atlas methodology) and a creditworthiness assessment.
Transition Framework. The Transition Framework establishes the overall principles and procedures for the processes of transition and reversal of a country's lending terms eligibility. The lending terms applicable to each country are reviewed prior to the start of every replenishment period and are effective in principle for the three year period. If IFAD finds that a country has become eligible for less concessional terms, the new terms are applied gradually over the replenishment period using a phasing-out/phasing-in mechanism. The lending terms are reviewed annually. In any such review, if a country becomes eligible for a reversal to more concessional terms, the reversal is effective the following calendar year.
IFAD provides loans on highly concessional, blend, and ordinary terms.
For highly concessional terms, eligible Member States are normally those that, at the end of the year before the start of the replenishment period:
- have a gross national income (GNI) per capita lower than, or equal to, the operational cut-off as determined annually by IDA
- have a GNI per capita higher than the operational cut-off but not classified by IDA as "gap countries" or "blend countries" or
- are classified by IDA as a "small state economy"
For blend terms, eligible Member states are normally those that, at the end of the year before the start of the replenishment period are classified by IDA as a "blend" or "gap" country.
For ordinary terms, eligible Member states are normally those that are not eligible for loans on highly concessional or blend terms.
Debt Sustainability Mechanism. The Debt Sustainability Framework (DSF) is a conceptual framework for providing debt relief to eligible countries (at IFAD, Member States eligible for highly concessional terms). The framework is based on technical economic country analyses called Debt Sustainability Analyses (DSAs), which are conducted by the International Monetary Fund and/or the World Bank working in collaboration with the countries concerned. One of the key outputs of a DSA is the risk of debt distress which can be: (i) low; (ii) moderate; (iii) high; or (iv) in debt distress. This classification determines which financing terms are applicable to eligible countries.
No commitment fee or front-end fee is applied on IFAD financing. Additionally, there is no cancellation fee or penalty for early repayment.
Non-concessional Borrowing Policy (NCBP). The NCBP is a multi-pronged policy aimed at tackling the problems of moral hazard and free riding in concessional lending. It focuses on deepening creditor coordination around the DSF as well as allows IFAD to apply remedies to countries that are borrowing excessively on non-concessional terms; remedies that could be applied are either a cut in the borrower's allocation or hardening of a borrower's lending terms.
Loans on highly concessional terms
Loans on highly concessional terms have a maturity period of 40 years, including a grace period of 10 years starting from the date of approval by the Executive Board. They are offered free of interest, but bear a service charge on the principal amount outstanding, subject to a floor of 0.75 per cent per annum with adjustments made for single-currency loans.
The amortization of a highly concessional principal of loan depends on a whether the Member State is a small state economy.
- If it is a small state economy, then the amortization is set at 2 per cent of the total principal withdrawn per annum for years 11 to 20, and 4 per cent of total principal withdrawn per annum for years 21 to 40.
- If it is not a small state economy, then the amortization is set at 4.5 per cent of total principal withdrawn per annum from years 11 to 30, and 1 per cent of total principal withdrawn per annum from years 31 to 40.
Grants provided under the Debt Sustainability Framework are not subject to a service charge or other fee.
Loans on blend terms
Loans on blend terms have a maturity period of 25 years including a grace period of five years starting from the date of approval by the Executive Board. They bear a service charge on the principal amount outstanding, subject to a floor of 0.75 per cent per annum with adjustments made for single-currency loans. In addition, interest is payable on the principal amount outstanding at a fixed rate of 1.25 per cent with adjustments made for single-currency loans, subject to a floor of zero per cent. The principal of loan is amortized at 5 per cent of the total principal withdrawn per annum from years six to 25.
Loans on ordinary terms
Such loans have a variable maturity and grace period. The maximum maturity period a borrower can request is 35 years, subject to a maximum average repayment maturity of 20 years. The maximum grace period is set at 10 years, starting from the date IFAD has determined that all general conditions precedent to withdrawal have been met.
- Average repayment maturity is the sum of the weighted average repayments of principal over the repayment period, therefore depends on the choice of maturity and grace period selected by the borrower.
- There are six average repayment maturity buckets (i.e. ranges of time of average repayment maturity) into which loans are classified: (i) up to eight years; (ii) more than eight up to 10 years; (iii) more than 10 up to 12 years; (iv) more than 12 up to 15 years; (v) more than 15 up to 18 years; and (vi) more than 18 up to 20 years.
The interest on ordinary loans consists of a market-based variable reference rate and a spread. Borrowers can choose between a variable spread and a fixed spread. The level of the spread on the loan is dependent on the average repayment maturity bucket as well as the income category of the borrower, subject to other country classifications.
Loans with an average repayment maturity longer than eight years include a maturity premium. The maturity premium is also differentiated by income category; borrowers can be currently classified as:
- standard maturity premium for borrowers with GNI per capita over US$ 7,065
- exempt from the maturity premium increase
- discount from the standard maturity premium for borrowers with GNI per capita up to US$ 7,065
- surcharge to the standard maturity premium for borrowers with GNI per capita greater than US$ 12,535
As soon as the conditions of first withdrawal have been fulfilled by the Borrower, the Fund will send an amortization schedule to the borrower. Repayments of principal are usually in equal amounts, however the option of varying repayment instalments is available.
Single Currency Lending
IFAD offers a Single Currency Lending (SCL) facility which allows member States to borrow in EUR or US$ as an alternative to SDR. All IFAD countries may request the currency of denomination of the financing which IFAD will grant at its discretion. Service charges and interest rates vary according to the denomination currency of the loan.
Grants may be provided to: (i) developing Member States; (ii) intergovernmental organizations in which Member States participate; and (iii) other entities which the Executive Board determines to be eligible pursuant to article 8 of the Agreement. Grants are provided in accordance with a policy for grant financing established by the Executive Board. Currently, 6.5 per cent of IFAD's replenishment is allocated to the grants programme. The Policy for Grant Financing and the related Implementing Procedures outline the rules and processes relevant to the grants cycle.
Lending and financial terms: Financial Officer Toolkit
See also the interest rates applicable for Quarter 4 2021: