OPIC Support Enables Microfinance Investors to Overcome Currency Risk, Expand Lending
July 14, 2009
WASHINGTON, D.C. – The Overseas Private Investment Corporation (OPIC) is providing $20 million to an innovative project that will enable microfinance investment vehicles (MIVs) to provide loans in local currencies to microfinance institutions (MFIs) in developing countries, thereby overcoming a major constraint to the growth of microfinance lending. The project is expected to mobilize nearly $140 million in lending to microentrepreneurs in its first year, and more than 400,000 microfinance loans over five years.
OPIC is providing a $20 million loan guaranty to MFX Solutions, a Washington, D.C.-based company which manages currency risk in the microfinance industry. MFX will offer currency hedging products such as currency swaps to MIVs, which in turn will provide loans in local currency to MFIs in various countries around the world, particularly in Africa. By enabling MFIs to borrow in their own currency, the project will significantly lower risk and thereby catalyze private capital flows into developing markets. ..
“The specter of currency risk has inhibited the expansion of lending to MFIs in many developing countries – until the development of this innovative project,” said OPIC Acting President Dr. Lawrence Spinelli. “OPIC is pleased to support a vehicle that will help to eliminate a major constraint to MFI lending, so that greater numbers of microentrepreneurs in developing countries can grow.”
While international lending to MFIs has increased substantially in recent years, further expansion has been constrained by the need for MFIs to receive loans in local currency in order to match the local currency assets on their balance sheets. Lenders, however, were unable to provide local currency loans because they could not hedge the associated foreign exchange risk. In many countries, hedges to address this exposure are either not available, not affordable, or require the provision of significant collateral.
In 2007, a consortium of leading microfinance organizations and investors – led by a steering committee comprised of Global Partnerships, ACCION International, and Calvert Foundation – began meeting to address the currency issue. At the same time, FMO, a Dutch development bank, developed the Currency Exchange Fund, known as TCX, which offers affordable hedging instruments to investors in countries where none are available. The consortium formed MFX as a vehicle to invest in TCX which allows MFX to manage the risk it assumes from the microfinance industry. MFX is also supported by Omidyar Network, a philanthropic investment firm.
The project is expected to support lending in more than 50 countries worldwide, predominately targeting Africa and Latin America, with about 20 percent of its funds allocated to Asia, Eastern Europe and the Middle East.