Comments on: MicroFinance Currency Risk

By: Kiva Loans to Entrepreneurs in Columbia, India and Kenya at Curious Cat Investing and Economics Blog

Wed, 05 Nov 2014 14:44:01 +0000

[…] have called things defaulted that just had the borrower paying everything back but there was a currency exchange loss – which is a loss to the lender but not truly a default). I would hope Kiva fixed that, but I […]

By: Kiva Entrepreneur Loans: Kenya, Honduras, Armenia... at Curious Cat Economics Blog

Sun, 17 Oct 2010 13:34:26 +0000

When looking for loans I give preference to loans that improve productivity and increasing capacity of the entrepreneur… A nice example of this is the loan to Douglas Osusu, Kenya. He has requested this loan to purchase a dairy cow and a posho grinding mill…

By: Zuber Karim

Zuber Karim — Fri, 01 May 2009 22:54:32 +0000

© Zuber Karim 2009
MFIs are also exposed currency risk, however, all stakeholders ignore it as a major catastrophe has not occurred yet, therefore they envisage no need for implementing preventive measures (Currency Risk in Microfinance, 2005:3). Microfinance Institute discusses four ways MFIs employ to mitigate this risk (Currency Risk in Microfinance, 2005:3), given as follows:
Risk Avoidance: This means that MFIs provide services to clients who generate dollars, specially those attached to the tourism industry. This leaves the poor segments unable to access financial services, thus undermining the very objectives MFIs intend to achieve.
Off-setting Risk: This is done by increasing interest rates and fees. Thus, deterring a sizeable number of clients from taking high interest rate loans. A recommended strategy would be to combine base rate with a fluctuating rate reflecting the currency depreciation.
Risk Diversification: This happens by investing in different countries, thus reducing risk on fund’s overall portfolio. However, this strategy is not used many. Thus, many major MFIs suffer from investment concentration [on one area] risk.
Risk Mitigation: Many techniques can be used to mitigate risk such as opening a dollar account in the host country and quickly converting local repaid local currency into dollar (Currency Risk in Microfinance, 2005:3).
Risk Diversification and Risk Mitigation better than the previous two as these strategies do not entail harming the poor which is evident in the former two. Adding to the latter two mitigating techniques, one wishes to propose that MFIs transact with the clients in dollars where in turn, the clients pay back using the same currency in cases where this is viable. In addition, MFIs may diversify the currencies they hold in a particular host country such as holding dollars, sterling, euros and yens simultaneously (Karim, 2008:9-10). Investors have woken up to this reality. Take an example of investment in GCC countries given on the graph below:

(Unable to upload. It can be accessed from: http://www.failaka.com/downloads/Tabreed%2006%20assign.pdf )(p.10).

Fig. 2 Source: Source: Dresdner Kleinwort, 2006 (Taken from Karim, 2008:10).

The chart above clarifies that the dollar was the single currency used in the investment for four years. But this changed significantly when other currencies such as euros, francs and sterlings entered the arena in 2006. The above testifies the resolve of some investors to diversify the currencies in investment capital as strategy to reduce foreign exchange rate risk.

By: 100th Entrepreneur Loan at Curious Cat Investing and Economics Blog

100th Entrepreneur Loan at Curious Cat Investing and Economics Blog — Mon, 20 Apr 2009 16:55:13 +0000

I made my 100th contribution to a micro-loan through Kiva last week. Participating with Kiva is a great antidote to reading about the unethical “leaders” taking huge sums to run their companies into the ground…

By: Anonymous

Anonymous — Wed, 18 Mar 2009 22:40:50 +0000

The news on this is that Kiva lenders will share part of the currency risk in future:
http://www.wiseclerk.com/group-news/services-microfinance/kiva-lenders-share-currency-risk/

By: Vielen Dank, Herr Spekulant? « Unternehmen Armut Weblog

Vielen Dank, Herr Spekulant? « Unternehmen Armut Weblog — Fri, 30 Jan 2009 16:46:19 +0000

[…] aufzubürden wirderspräche der Idee von Mikrofinanz komplett. Es die Mikrofinanzorganisation (so bei kiva) tragen zu lassen ist ebenfalls problematisch, da diese oft klein und mit wenig eigenem Kapital […]

By: John

John — Sun, 19 Oct 2008 20:02:29 +0000

Wow, I never knew that. It seems like that could lead to huge problems with Kiva if the banks aren’t hedging their risk.

By: Ryan Calkins

Ryan Calkins — Sun, 19 Oct 2008 19:23:26 +0000

I had a chance to travel with Global Partnerships, a microfinance investment vehicle akin to Unitus or Oikocredit, to Nicaragua last fall. The interest rate charged by the local MFIs seemed high to many of us. But as we evaluated the risks the MFIs take on (including currency fluctuations, defaults, fraud) as well as the relatively high cost of loan administration, it became clear why interest rates ranged from 15%-35% annualized. The other anecdote that I and others on the trip took away from our conversations with borrowers was their savvy about this very topic. In a microfinance market like Nicaragua, where there is competition between MFIs in most areas, the borrowers shop around until they get the best deal.