Risky Business: An Empirical Analysis of Foreign Exchange Risk Exposure in Microfinance
February 05, 2011
This research was published more than 5 years ago, some information may be out of date.
This study, by MFX Solutions and Dutch development finance instituttion FMO, documents the extent to which microfinance institutions (MFIs) have foreign exchange mismatch, and thus are threatened by currency volatility. Using publically available 2008 financial data from over 300 MFIs worldwide (representing approximately 60% of the total assets in the industry), it details the impact of currency movements on MFIs' net income, and the prevalence of microloans indexed to hard currencies. The study was funded by Dutch Development Bank, FMO and authored by Julie Abrams of Microfinance Analytics.
Key Highlights:
- Total industry foreign exchange risk exposure is at least US$6 billion of which US$ 4.5 billion has been on-lent in foreign currencies to borrowers
- 65% percent of MFIs hold more than a prudent amount of foreign exchange risk exposure on their books as a proportion of their equity
- While it was assumed that most MFIs would be exposed to devaluation of their own currency, many MFIs hold excessive hard currency and would be hurt in the event of a dollar or euro devaluation.
- 40% of reporting MFIs disclose that they make foreign currency loans to their borrowers
