Managing High and Hyper Inflation in Microfinance: Opportunity International's Experience in Bulgaria and Russia

This paper presents the effects of hyperinflation on microfinance institutions (MFIs) and the legal and institutional options available to cope with such a scenario. Synthesizing lessons from one case each in Russia and Bulgaria, the paper identifies and suggests the following actions that can be initiated by MFIs to overcome macroeconomic shocks:

• Introducing flexibility of products in terms of the denominated currency, loan term and size and in revising the interest rates;
• Decentralizing decision-making in rescheduling loans and initiating legal action;
• Ensuring continued lending operations as discontinuation leads to increased default rate;
• Managing banking risks and moving funds to safer banks;
• Managing good relationships with external funders.

The paper emphasizes the need for MFIs to share hyperinflationary risks with clients by using multiple options for pegging loans:

• Making repayments in U.S. dollar or other stable currency as it offers transparency to client;
• Using inflation index, which reflects real price levels;
• Using commodities, which is better suited to the repayment capacity of the clients and thus reduces default levels.

The paper analyses the macroeconomic environment and the institutional operational structure of MFIs to arrive at the above conclusions through inputs from poor and emerging economies.