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

This issue of InSight presents the results of a survey conducted by ACCION International of its Latin American affiliates with regard to the following questions:

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

It identifies the following three major categories of change in foreign exchange rates:

• Depreciation;
• Devaluation;
• Appreciation.

The article discusses:

• The different types of MFIs that make up ACCION's affiliates in Latin America;
• Their borrowing in foreign currencies;
• The attraction that foreign currency debt has for MFIs with foreign currency liabilities;
• The reasons for some MFIs to choose to avoid foreign currency debt and the financial options that they have;
• Risk mitigation for MFIs borrowing in a foreign currency;
• The role of dollarization in mitigating foreign exchange rate risk.

The report concludes that:

• Most ACCION affiliates in Latin America do not have exposure to foreign exchange rate risk;
• They have access to attractive local sources of funds;
• Those that do have foreign exchange rate risk exposure generally operate in dollarized economies;
• They mitigate risk either by balancing foreign currency assets and liabilities or through hedging.