Addressing Foreign Currency Risk for the Microfinance Industry

In order to meet the global capital demand in microfinance, private investment flows into the sector need to increase. Microfinance experts cite foreign exchange risk as a significant impediment to increasing investment. This paper discusses the findings of a conference call, conducted by Grameen Foundation USA (GFUSA) to explore foreign exchange (FX) risk, involving twelve microfinance stakeholders.

The participants shared their view on:

• Current practices to address FX;
• Best resources used in FX hedging;
• Future trends in FX hedging.

The key conclusions in the conference call were:

• Lack of cost-effective FX hedging options constrain international commercial investment;
• FX risk cannot be hedged 100%, but must be managed;
• Significant outside support is needed to add liquidity in the market.

The paper also discusses GFUSA's initiative to address FX risk through:

• Providing GFUSA guarantee product to leverage the assets of international investors;
• Dedicating professional staff to facilitate transactions, internationally and locally;
• Offering working papers on microfinance industry investing information;
• Educating the investors through direct contacts, interviews and discussions.