• Commercialisation of microfinance

Commercialisation of microfinance

As the microfinance industry matures and MFIs require increasing amounts of capital from a variety of sources, there has been extensive growth in international lending to MFIs and a similar increase in foreign exchange risk for MFIs.

As microfinance managers seek to finance their future business plans, this Progress Note offers five suggestions on how to best minimise or manage risk. The five ways are:

• avoid it: pursue local currency loans first by borrowing from local banks, accessing local capital markets, or by negotiating local currency loans from international lenders
• establish policies on foreign exchange management and exposure: MFI managers should calcuate their institution's ability to absorb potential losses and put procedures in place to mitigate the effects of or avoid an internal crisis
• convert hard currency loans to local currency risk: use the foreign currency loan from a microfinance fund as collateral for a local currency loan from a local bank
• explore foreign exchange hedging instruments
• other less ideal alternatives, such as passing on the cost to clients.

The Note concludes that:

• MFI managers should seek professional assistance before taking on foreign currency obligations
• donors should facilitate direct access to local currency funds from local banks, institutional investors, and the capital markets
• MFIs need to consider which foreign exchange risk management alternatives are available to them in their market and are appropriate for their organisation.

• Full text of document
• Publisher details
• Send to a friend