New Solution for Currency Risk Threat to Microfinance

As anybody working in microfinance knows, a growing challenge for the industry is currency risk. Microfinance institutions (MFIs) often borrow in hard currencies like U.S. dollars or euros. But they loan to local borrowers in local currency. If local currency drops in value–which it often does in the countries where microfinance investors such as Global Partnerships work–paying back foreign loans becomes more expensive and MFIs typically need to pass on the costs to borrowers in the form of higher interest rates.

But as you may have read this week, there’s a new solution on the horizon: MFX Solutions, a new company that launched operations on Tuesday with the help of industry leaders such as Global Partnerships, Accion International, Omidyar, and Calvert Foundation.

MFX will, for the first time, make sophisticated hedging instruments accessible to microfinance lenders, along with free, web-based risk management tools tailored to the microfinance business model. By doing this, MFX will allow lenders to make more local currency loans to under-served markets, and will increase the stability of the industry. Most important, reducing currency risk will benefit micro-entrepreneurs in the developing world by making them less vulnerable to the consequences, such as less affordable loans.

MFX, the product of a three-year collaboration between industry leaders, got its start from a “we’re all in it together” approach. Global Partnerships’ Gary Mulhair, who co-chaired the initial planning committee, recalled that many in the microfinance industry have wrestled with the foreign exchange risk challenge. “Separately we tried various solutions, but they were all expensive ‘one-offs.’ So, we decided to work together.”

We’re proud to have been an early leader in the creation of MFX.

Read the press release about MFX Solutions here and the Seattle Times post about MFX here.