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Library » Microfinance Institutions and Foreign Exchange Risk: The Experience of ACCION's Latin American Affiliates

Microfinance Institutions and Foreign Exchange Risk: The Experience of ACCION's Latin American Affiliates
2006, Sicard, C.

How great a threat does exposure to foreign exchange rate risk represent to microfinance institutions?

This issue of InSight presents the results of a survey conducted by ACCION International of its Latin American affiliates with regard to the following questions:

How great a threat does exposure to foreign exchange rate risk represent to microfinance institutions (MFIs)?
What motivates MFIs to acquire liabilities in a foreign currency?
Do MFIs understand the exchange rate risks involved, and if so, how do they manage them?

It identifies the following three major categories of change in foreign exchange rates:

Depreciation;
Devaluation;
Appreciation.

The article discusses:

The different types of MFIs that make up ACCION's affiliates in Latin America;
Their borrowing in foreign currencies;
The attraction that foreign currency debt has for MFIs with foreign currency liabilities;
The reasons for some MFIs to choose to avoid foreign currency debt and the financial options that they have;
Risk mitigation for MFIs borrowing in a foreign currency;
The role of dollarization in mitigating foreign exchange rate risk.

The report concludes that:

Most ACCION affiliates in Latin America do not have exposure to foreign exchange rate risk;
They have access to attractive local sources of funds;
Those that do have foreign exchange rate risk exposure generally operate in dollarized economies;
They mitigate risk either by balancing foreign currency assets and liabilities or through hedging.

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Publisher(s):
ACCION International