Education Center
One of the core aspects of MFX’s mission is to provide decision support to microfinance practitioners on currency risk and hedging. In this section you can find resources to better understand the problem that currency mismatch poses to the microfinance industry, how hedging works, and tools that can help organizations make more informed decisions about currency risk.
RISKY BUSINESS: An Empirical Analysis of Foreign Exchange Risk Exposure in Microfinance (Click here for PDF)
The study documents the extent to which microfinance institutions (MFIs) have foreign exchange mismatch, and thus are threatened by currency volatility. Using publically available 2008 financial data from over 300 MFIs worldwide (representing approximately 60% of the total assets in the industry), it details the impact of currency movements on MFIs’ net income, and the prevalence of microloans indexed to hard currencies. The study was funded by Dutch Development Bank, FMO and authored by Julie Abrams of Microfinance Analytics.
Key Highlights:
- Total industry foreign exchange risk exposure is at least US$6 billion of which US$ 4.5 billion has been on-lent in foreign currencies to borrowers
- 65% percent of MFIs hold more than a prudent amount of foreign exchange risk exposure on their books as a proportion of their equity
- While it was assumed that most MFIs would be exposed to devaluation of their own currency, many MFIs hold excessive hard currency and would be hurt in the event of a dollar or euro devaluation.
- 40% of reporting MFIs disclose that they make foreign currency loans to their borrowers
Practitioners’ Guides to FX Hedging
The following guides are designed to explain fx hedging products. The content is intended for an audience that is new to hedging and is eager to understand how it works.
We also offer free webinars to explain our products. Please contact us if you are interested in this service.
How to Identify, Quantify, and Manage FX Risk
Understanding FX Spot Transactions
Understanding Cross Currency Swaps
Understanding Non-Derivative Hedging Alternatives
General Reading on FX Risk and Microfinance
MFX Summary on FX Risk in Microfinance
CGAP (May 2010) Microfinance Foreign Exchange Facilities Foreign capital investment in microfinance has been booming over the past four years. It can bring important benefits to MFIs, but it also comes with foreign exchange risk.
CGAP Focus Note (June 2009) Asset and Liability Management for Deposit-Taking Microfinance Institutions As MFIs diversify their funding sources, sound asset and liability management (ALM) is critical to help MFIs assess and manage financial risk.
Women’s World Banking (2007) From Dinar to Dollar: The Rise of Local Currency Lending and Hedging in Microfinance This paper highlights recent advances in minimizing foreign exchange risk in microfinance, via both local currency lending by international investors, and risk hedging by microfinance institutions.
CGAP Focus Note (Jan 2006) Foreign Exchange Rate Risk in Microfinance This Focus Note discusses issues related to foreign exchange rate risk in microfinance. It explains what exchange rate risk is, looks at techniques used by MFIs and investors to manage the risk, and makes recommendations on managing and avoiding risk.