Global Partnerships and Unitus in Collaboration to Reduce Currency Risk for Microfinance Borrowers
November 18, 2008 3 CommentsGlobal Partnerships and Unitus, along with a number of the world’s other leading microfinance investment vehicles, have created an organization to handle bulk currency swaps. The new organization, MFX Solutions, will allow Global and Unitus to lend in local currency. Because of the volatility of exchange rates, lending in local currency significantly reduces risk for microfinance institutions in non-dollar or euro economies. As a result, interest rates on loans to micro borrowers are lower.
Puget Sound Business Journal reported on the collaboration and on Global Partnerships’ new fund that leverages $1.5million in philanthropy to make $20million available for microloans.
News and Commentary
Initially, I thought this was a great idea; now I’m confused. Here’s why:
An MFI receives a loan in currency X from Unitus. My understanding is that these are large loans intended to finance lending to hundreds (thousands?) of individual borrowers. The MFI may not be able to lend out all the Unitus funds. In order to avoid depreciation on those funds (in currency X) wouldn’t the MFI be compelled to change the them back into dollars while they await disbursement to future borrowers? Does that negate the benefit of lending the original bulk funds in local currency? And worse, wouldn’t this discourage lending by MFIs because they may be able to earn more from depreciation of the local currency (in which their loan will have to be repaid) with respect to the dollar (in which they’ll hold funds) than from actually lending to individuals?
Very nice article, I feel also Global Partnerships and Unitus in Collaboration to Reduce Currency Risk for Microfinance Borrowers, thanks for sharing such an informative article
New Technology
The new organization, MFX Solutions, will allow Global and Unitus to lend in local currency. Because of the volatility of exchange rates, lending in local currency significantly reduces risk for microfinance institutions in non-dollar or euro economies.
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thomasjimmy