Microfinance Institutions and Foreign Exchange Risk: The Experience of ACCION’s Latin American Affiliates

Topic :

This short paper notes at the outset that some observers have suggested that many microfinance institutions are now acquiring resources in foreign currency, without understanding or effectively managing the risks. The paper aims to explore the following questions in relation to this comment:

  • How great a threat does exposure to foreign exchange rate risk represent to microfinance institutions (MFIs)?
  • What motivates MFIs to acquire liabilities in a foreign currency?
  • Do MFIs understand the exchange rate risk involved, and if so, how do they manage them?

The paper presents the results of ACCION International’s survey of it Latin American affiliates on these questions. The survey found that the majority of ACCION affiliates do not have exposure to foreign exchange rate risk, because they do not have foreign currency debt. Those institutions with foreign exchange risk were employing effective mechanisms to manage that risk.

The following areas are discussed:

  • What is foreign exchange rate risk?
  • The exposure of ACCION’s Latin American affiliates to foreign exchange rate risk
  • The decision to acquire foreign currency debt
  • The decision to avoid foreign currency debt
  • Risk mitigation for MFIs borrowing in a foreign currency
  • The role of dollarization in mitigating foreign exchange rate risk

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