Paper
Microfinance Institutions and Foreign Exchange Risk: The Experience of ACCION's Latin American Affiliates
Examining the foreign exchange risk exposure of MFIs
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12 pages
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 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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