A soft loan is a loan with a below-market rate of
interest
In finance and economics, interest is payment from a debtor 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 distinct f ...
. 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 Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...
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
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 language, Bengali: , , abbr. WB) is a States and union territories of India, state in the East India, eastern portion of India. It is situated along the Bay of Bengal, along with a population of over 91 million inhabi ...
(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 the borrower is able to.
References
Loans
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