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Library » Risky Business: An Empirical Analysis of Foreign Exchange Risk Exposure in Microfinance

Risky Business: An Empirical Analysis of Foreign Exchange Risk Exposure in Microfinance
Jan 2011, Abrams, J.
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Assessing foreign exchange risk of MFIs

This study examines the extent MFIs’ foreign exchange risk. It studies various aspects of currency exposure to assess its size, direction, potential risk to MFIs’ viability and effect of currency fluctuation on earnings.

The paper discusses four different measures of MFI foreign exchange risk, namely, net open position, net open position as a percentage of equity, asset-liability ratio and foreign exchange gains or losses. The study reveals high levels of prevalence and complexity of MFI foreign exchange risk.

The paper makes recommendations to help mitigate foreign exchange risks. They are:

Developing industry-wide prudent foreign exchange risk exposure guidelines;
Expanding availability and usage of hedging resources;
Providing training and capacity-building for MFIs in asset-liability management and financial risk management;
Limiting foreign currency onlending and maintain foreign exchange risk exposure at prudent levels;
Tracking and monitoring foreign exchange risk at MFI level;
Improving transparency of MFIs;
Encouraging disbursement of local currency loans by cross-border lenders;
Disclosing foreign exchange risk levels;
Establishing mandatory prudent foreign exchange risk exposure limits at national level.

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31 May 2011


An interesting survey, but a caveat on the recommendations. This is an interesting snapshot that reveals some surprising facts about foreign exchange exposure of MFIs. The survey is based on 2008 data. It would be nice if it can be repeated in the future to see how the exposure develops over time. The recommendations are well meaning, nobody can object to them per se, though the price for controlling foreign exchange risk might be less availability of funds. Someone has to take the risk, either the end client, the MFI, the investor or a third party willing to take the risk. If the end client is not a suitable taker and all the others need to keep their exposure within a reasonable limit, less funds might flow. Is it reasonable to forsake the continuous benefits these funds may bring to the poor for the prevention of an eventual foreign exchange risk induced default? Contrary to the last sentence in the conclusion of the study, might better understanding and proper mitigation of foreign exchange risk not lead to less, and not greater, access to finance for the poor in developing countries? This is a question that is at least worth asking.

Ming-Yee Hsu Cambodia

14 Feb 2011




Careaga Héctor Banco FIE S.A. Bolivia

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Publisher(s):
Microfinance Currency Risk Solutions