When it comes to international loans from development finance institutions or investment funds issued to microfinance institutions (MFIs), the typical currency used is the US dollar or euro. As MFIs hold foreign currency loans, they face the risk of devaluation of their local currency. To minimize that risk, MFIs lend to their customers in foreign currency loans or by indexing microloans to the foreign currency exchange rate.
This is a huge problem for microentrepreneurs, says MFX Solutions. Their 2010 study found that MFIs carried more than $6 billion of currency exposure.
MFX supports lending to entrepreneurs in low-income countries by offering currency swaps and forward contracts to international micro, small, and medium enterprise lenders to offset the risk they take when lending in the local currency of their borrowers. Today, they have reached a milestone of mitigating the risk of over $500 million in microfinance loans.
“This milestone demonstrates that international microfinance lenders are indeed moving toward a safer, more equitable model of lending in local currency,” said MFX CEO Brian Cox. “We are proud to be part of this transformation, and we are convinced that better risk management is key to microfinance reaching its potential. ”
These loans have been made in more than 30 currencies and have benefited over 800,000 entrepreneurs globally.
“When Omidyar Network first invested in 2009, we predicted that MFX would transform the industry by solving the fundamental problem of currency mismatch, which puts microentrepreneurs at serious risk,” said Eliza Erikson, chair of the board at MFX and a director of investments at Omidyar Network. “MFX has since surpassed even our most optimistic expectations, and we see the microfinance sector as just the beginning. As impact investing begins to expand, it will need partners like MFX to reach its true potential.”
“Our partnership with MFX is critical to how we do business,” said Rita van den Abbeel, Chief Risk Officer at Incofin IM, a Belgium-based microfinance fund. “MFIs need funding in their own currencies in order to grow safely. On the other hand we also have to respect our investors risk appetite which limits the amount of currency exposure we can take. Thanks to MFX, we are able to meet the needs of the MFIs and their micro-entrepreneur clients while effectively managing our risk as required by our investors.”
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