Microfinance Foreign Exchange Facilities: Performance and Prospects

01 April 2010

Foreign capital investment in microfinance has been booming over the past four years. Commercial cross-border debt and equity invested in microfinance surpassed US$11 billion in 2009, representing an estimated 20 percent of the funding base for specialized microfinance providers. Foreign investment brings important benefits for microfinance institutions (MFIs). It can provide longer term debt maturity and risk capital that often is not available in the local market, but it can come with a significant string attached: foreign exchange risk.

Seventy percent of cross-border, fixed-income investments are denominated in foreign currencies (meaning currencies other than the currencies in which the MFIs are operating), leaving MFIs with significant foreign exchange exposure. During the most recent global financial crisis, some MFIs that depend on foreign currency-denominated debt have suffered heavy foreign exchange losses that threaten their overall viability (Littlefield and Kneiding 2009). And local currency hedging needs for microfinance is estimated at US$1.5 billion in 2009.