MFX Story

Starting in 2005, a group of microfinance organizations -- lenders, investors, raters, networks, and foundations -- came together to seek an answer to the growing problem of currency risk in the microfinance industry. This collaboration resembled a microfinance village bank – pooling resources for a common good. Led by ACCION International, Calvert Foundation, MicroRate, Global Partnerships and Calmeadow Foundation, along with many of the most prominent organizations in microfinance, this group initiated and funded an industry project to examine all aspects of the problem and develop a comprehensive solution.

Examination of the Problem
The Group observed that the need for better currency risk management is driven by several trends:

• Rapid modernization of microfinance requiring MFIs to meet higher regulatory standards, including for risk-weighted capital.
• Dramatic increases in new, commercially-oriented microfinance funds creating a growing supply of hard currency funding and therefore a growing volume of currency mismatch.
• Currency risk acting as a major barrier in traditionally underserved markets such as sub-Saharan Africa where the risk of devaluation has historically limited international lending.

Failure to address these trends with new currency risk tools puts the industry's growth and stability at risk.

Education is Key
The problem is not only a lack of tools but of knowledge. Before MFIs can avail themselves of new techniques to manage currency risk, many need assistance in understanding and quantifying the risks they are assuming by borrowing in hard currency. This calls for a multi-pronged approach that combined accessible technical assistance with modern financial market instruments.

The Solution
In January 2008, the Group organized MFX Solutions (MFX), an organization dedicated to providing microfinance lenders with the know-how to quantify currency risk along with affordable and accessible hedging instruments to mitigate currency risk.

The founders' vision was to create a full-service industry initiative tailored to the needs of microfinance organizations. As MFX grows and works with more microfinance institutions, investors and other industry stakeholders that share its vision, MFX will focus on the following priorities:

• understanding microfinance client needs and tailoring product to meet them;
• inclusive governance;
• collaboration on education projects;
• access to hedging for smaller lenders; and
• pricing and allocation policies that maximize benefits to the microfinance industry.