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This Focus Note discusses issues related to foreign exchange rate risk in microfinance. It explains what exchange rate risk is, looks at techniques used by MFIs and investors to manage the risk, and makes recommendations on managing and avoiding risk.
Many microfinance institutions in developing and transition economies receive foreign funding. This Focus Note looks at these "foreign investors" and the demand for their services. It presents a view of the market and addresses key questions, including How much foreign investment in MFIs is really private? How much of this investment is really commercial? Where is the investment being placed, in terms of region, number, and type of MFIs? Are investors competing to invest in MFIs? As MFIs grow and absorb more funding, what is the likely role of foreign investment compared with domestic sources? Does foreign debt create inappropriate currency risks for MFIs? and What practical lessons emerge from this analysis?
Renewed emphasis on poverty reduction has put rural populations, particularly
agricultural households, back in the spotlight of development efforts.
Agricultural development programs often include credits for agricultural
production, which have renewed the debate about how to provide finance in rural
areas. This paper offers a model (agricultural microfinance), for providing
financial services to poor, rural farming households, which combines the most
relevant and promising features of traditional microfinance, traditional
agricultural finance, and other approaches.
(adapted from Elizabeth Littlefield and Richard Rosenberg, "Microfinance and the
Poor: Breaking Down the Walls between Microfinance and Formal Finance," Finance & Development 41, no. 2 (June 2004): 38-40)
There is a dawning understanding that developing countries' financial systems
need to be more accessible to poor people and that there are practical ways to
make this happen. All kinds of financial institutions--regulators, mainstream
rating agencies, commercial and state banks, insurance companies, and credit
bureaus--are starting to play a part in developing sound, inclusive financial
systems that serve the majority of poor countries citizens.
This CGAP analysis of the distinguishing features of 33 microfinance support
organizations differentiates their roles and identifies broad trends that
characterize their organization and activities. This Note also offers a list of
questions to guide donors when appraising networks for potential funding.
Here are the results of CGAP's survey of the global outreach of a broad set of institutions that extend financial services downward---institutions with a "double bottom line" of financial and social/development objectives. The survey found that over 750 million acccounts exist below the traditional level of commercial banks, and that a substantial fraction of these predominantly savings accounts probably belong to the poor or near poor--and represent an important opportunity for outreach.
This CGAP study reveals that governments and multilateral agencies have funded nearly 90% of the US$ 1.1 billion in total investment in microfinance through quasi-commercial debt, equity, and guarantees. Privately managed microfinance investment funds are expected to double their capital by mid-2004. Microfinance institutions and investors must become more transparent about their performance before commercial capital reaches the volumes needed to fund massive outreach. However, the dominant source of funds for microfinance will likely remains deposits and domestic capital sources.
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