A Primer on Currency Risk Management for Microfinance Institutions

Recommending effective foreign exchange hedging practices for MFIs
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This document discusses MFIs’ vulnerability to foreign exchange (forex) risk and describes two case studies in which J.P. Morgan helped MFIs manage their forex risk.

MFIs operating in developing countries run a high risk of currency depreciation. Currency risk also affects institutions that provide funding for MFIs. Organizations like Grameen Foundation USA raise their own funding in U.S. dollars while extending loans to MFIs around the world in their respective local currencies. Currency risk management for MFIs should revolve around reducing risk associated with currency fluctuations through hedging.

The document presents two J.P. Morgan projects with Grameen Foundation’s Bankers without Borders program, which connects private sector volunteers with microfinance and technology-for-development initiatives that aim to break the poverty cycle. It describes how teams from J.P. Morgan:

  • Evaluated the forex risk management practices of MBK Ventura, an Indonesian MFI, and helped it to develop a more robust forex risk management framework;
  • Helped Grameen Foundation manage forex risk of its existing loan portfolio and its new Pioneer Fund, a local currency financing facility for MFIs and related entities.

About this Publication

By Diamantini, S.