A soft loan is a loan with a below-market rate of
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
. This is also known as ''soft financing''. Sometimes soft loans provide other concessions to borrowers, such as long repayment periods or interest holidays. Soft loans are usually provided by governments to projects they think are worthwhile. The
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
and other development institutions provide soft loans to developing countries.
This contrasts with a hard loan, which has to be paid back in an agreed hard currency, usually of a country with a stable robust economy.
An example of a soft loan is a $2 billion loan by
China's
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
Export-Import Bank to Angola in October 2004 to help build infrastructure. In return, the Angolan government gave China a stake in oil exploration off the coast. Another example is the interest free soft loan of
Rs. 20 billion given by the
Asian Development Bank (ADB) to the government of
West Bengal
West Bengal (, Bengali: ''Poshchim Bongo'', , abbr. WB) is a state in the eastern portion of India. It is situated along the Bay of Bengal, along with a population of over 91 million inhabitants within an area of . West Bengal is the fourt ...
(India) on the condition that it be used for health, education and developing infrastructure, and that the government would implement 16 economic reforms.
The field of natural finance uses the term "soft loan" as an enforced ability–based repayment loan where the softness is not based on below market interest, but rather on terms that do not include fixed dates for repayment, but do mandate repayment when borrower is able to.
References
Loans
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