The following post was published on the USAID‘s Microlinks blog today, Thursday, Nov. 4. It was written by Eric Meyer, Opportunity’s agricultural finance manager, who is guest blogging about the 2010 Annual SEEP Conference in Arlington, Va. this week for Microlinks. Click hereto see the original post.
When the global financial crisis hit in late 2008, manymicrofinance institutions (MFIs) found it very challenging to manage their businesses in increasingly volatile macro environments. In many regions, severe depreciations of local currencies against the US Dollar and Euro nearly devastated those institutions that had taken out long-term, hard currency loans and then lent in local currency at market rates. As local currencies lost value against the hard currencies, MFIs that accepted this balance sheet exposure found themselves owing significantly more on their funding liabilities. In fact, many institutions experienced a 40+ percent increase in cost of servicing their debt as local currencies depreciated, invariably causing severe liquidity and even solvency challenges.
Since the events following the financial crisis, investors and microfinance institutions have become much more conscientious of the types of currency risks they take in order to achieve portfolio growth. The lessons learned and solutions which help manage this risk were discussed in today’s panel entitled “Managing Risks Related to MFI Funding: Data and Tools for Managers and Investors.” During the session, Ralitsa Sapundzhieva of Microfinance Information Exchange (or MIX) discussed MIX’s Funding Structure Tool, which allows industry stakeholders to obtain a comprehensive view of the debt financing for the industry at local, regional, and global levels in order for practitioners and investors to make more informed investing and funding decisions. Additionally, Brian Cox ofMFX Solutions discussed the stress analysis and hedging tools available for MFIs to better manage the risks associated with external currency funding. As the industry becomes more complex in the types of investments and funding options available to MFIs, these resources serve as useful examples of the tools needed to manage funding risk in an environment where funding options are limited and exchange rates remain unpredictable.