MFI financing and currency risk: currentmitigants and innovative instrumentsEuropean Microfinance Week 2007:“European resp...
Agenda1.    Risk-Related Issues in Microfinance2.    Traditional Options to Reduce Foreign Exchange      Risk3.    Other M...
Risk-Related Issues in Microfinance increased role of microfinance increased foreign funds and higher commercial approac...
Agenda1.    Risk-Related Issues in Microfinance2.    Traditional Options to Reduce Foreign Exchange      Risk3.    Other M...
Options to Reduce Foreign ExchangeRisk I. Options to reduce the foreign exchange risk traditionally used by stakeholders ...
Traditional Options to Reduce ForeignExchange Risk (I)Mitigating mechanisms used by donors/ lenders ready tolend in local ...
Traditional Options to Reduce Foreign Exchange Risk (I)B) Mitigating mechanism used by MFI accepting finance in foreign   ...
Exploring Other Mechanisms (I)1.   Improving MFIs access to local financial markets    Using partial loan guarantees to f...
Agenda1.    Risk-Related Issues in Microfinance2.    Traditional Options to Reduce Foreign Exchange      Risk3.    Other M...
Exploring Other Mechanisms (II)Linking international capital markets and microfinanceby using diversificationPromoting pr...
Agenda1.    Risk-Related Issues in Microfinance2.    Traditional Options to Reduce Foreign Exchange      Risk3.    Other M...
Improving MFIs Access to Local Financial Markets (I)Using partial loan guarantees to facilitate local bank lending   M   E...
Improving MFIs Access to Local Financial Markets (II)Hedging the risk through derivatives In order to develop the local f...
Agenda1.    Risk-Related Issues in Microfinance2.    Traditional Options to Reduce Foreign Exchange      Risk3.    Other M...
Improving MFIs Access to Local Capital Markets (I)Guarantees to bond issuance  ME  SME  ME  SME  SME  ME                  ...
Improving MFIs Access to Local  Capital Markets (II)Local microfinance securitisation                        MFI          ...
Agenda1.    Risk-Related Issues in Microfinance2.    Traditional Options to Reduce Foreign Exchange      Risk3.    Other M...
Tapping International Capital Markets (I) increasing number of institutions willing to fulfil certain  Corporate Social R...
Tapping International Capital Markets (II)Private Equity Funds allow linking international investors with MFIs are equity...
Tapping International Capital Markets (III)Microfinance debt funds allow diversifying the risk by providing loans to MFIs...
Tapping International Capital Markets (IV)Cross border microfinance securitisation   ME    ME                           MF...
Tapping International Capital Markets (V)Creating a international fund proposing hedgeinstruments     Donors are explorin...
Tapping International Capital Markets (VI)IFC Matching Assets Through Currency Hedging (Match)    IFC is working on creat...
Tapping International Capital Markets (VII)Funds targeting Second tier and rural MFIsRural Impulse Fund (RIF)    Majority...
Your Experiences and IdeasExperiences from the working group-Challenges-OpportunitiesOther instruments not mentionedOth...
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MFI financing and currency risk: current mitigants and innovative instruments

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  • Between Management Committee and Board of Directors the project information is passed by the Member States and Commission for tacit approval/opinion.
  • Between Management Committee and Board of Directors the project information is passed by the Member States and Commission for tacit approval/opinion.
  • MFI financing and currency risk: current mitigants and innovative instruments

    1. 1. MFI financing and currency risk: currentmitigants and innovative instrumentsEuropean Microfinance Week 2007:“European responses to global microfinance challenges”ACP IF IV DivisionGuadalupe de la Mata– Loan Officer
    2. 2. Agenda1. Risk-Related Issues in Microfinance2. Traditional Options to Reduce Foreign Exchange Risk3. Other Mechanisms 3.1 Improving MFIs Access to Local Financial Markets 3.2 Improving MFIs access to Local Capital Markets 3.3 Tapping International Capital Markets
    3. 3. Risk-Related Issues in Microfinance increased role of microfinance increased foreign funds and higher commercial approach for microfinance support raise Issue of foreign exchange risk, its potential impact in MFI’s development and survival, and the mechanisms to avoid or limit it  foreign exchange risk typically arises when an MFI borrows funds in a foreign currency and onlends to local micro-enterprises in domestic currency
    4. 4. Agenda1. Risk-Related Issues in Microfinance2. Traditional Options to Reduce Foreign Exchange Risk3. Other Mechanisms 3.1 Improving MFIs Access to Local Financial Markets 3.2 Improving MFIs access to Local Capital Markets 3.3 Tapping International Capital Markets
    5. 5. Options to Reduce Foreign ExchangeRisk I. Options to reduce the foreign exchange risk traditionally used by stakeholders Mitigating mechanisms used by donors/ lenders ready to lend in local currency. Mitigating mechanism used by MFI accepting finance in foreign currency II. Exploring other mechanisms deepening local financial and capital markets attracting finance from the international capital markets
    6. 6. Traditional Options to Reduce ForeignExchange Risk (I)Mitigating mechanisms used by donors/ lenders ready tolend in local currency1. Lending in local currency- apply a premium to cover the currency risk2. Lending in local currency and issuing a bond in local currency to cover the exchange risk3. Lending in local currency- Borrowing from a local bank and on-lending to the MFI4. Hedging the risk through derivatives
    7. 7. Traditional Options to Reduce Foreign Exchange Risk (I)B) Mitigating mechanism used by MFI accepting finance in foreign currency1. Lending in hard currency- MFI accepts the foreign exchange risk and takes the loan in hard currency2. Lending in hard currency- MFI Matches liabilities denominated in foreign-currency to assets denominated in that same currency3. Lending in hard currency – MFI creates foreign currency reserves4. Lending in hard currency -Back-to-back loans
    8. 8. Exploring Other Mechanisms (I)1. Improving MFIs access to local financial markets Using partial loan guarantees to facilitate local bank lending Using portfolio guarantees Hedging the risk through derivatives2. Improving MFIs access to local capital markets Guarantees to bond issuances Domestic securitizations of microcredits3. Linking international capital markets and microfinance
    9. 9. Agenda1. Risk-Related Issues in Microfinance2. Traditional Options to Reduce Foreign Exchange Risk3. Other Mechanisms3.1 Improving MFIs Access to Local Financial Markets3.2 Improving MFIs access to Local Capital Markets3.3 Tapping International Capital Markets
    10. 10. Exploring Other Mechanisms (II)Linking international capital markets and microfinanceby using diversificationPromoting private equity funds investing in the capital of localMFIsPromoting international lending in local currency throughinternational debt funds diversifying across local currenciesInternational securitisations (cross border)by developing Hedging InstrumentsCreating a international fund proposing hedge instruments tomicrofinance lenders and donorsAttracting remittances to MFIs
    11. 11. Agenda1. Risk-Related Issues in Microfinance2. Traditional Options to Reduce Foreign Exchange Risk3. Other Mechanisms3.1 Improving MFIs Access to Local Financial Markets3.2 Improving MFIs access to Local Capital Markets3.3 Tapping International Capital Markets
    12. 12. Improving MFIs Access to Local Financial Markets (I)Using partial loan guarantees to facilitate local bank lending M E M Microfinance E Institutio n M Longer External E Microcredits Guarantors Reduced Term/ Local (Donor) M Rate Bank Guarantee E M E M Portfolio of E M Microcredits E
    13. 13. Improving MFIs Access to Local Financial Markets (II)Hedging the risk through derivatives In order to develop the local financial market, some international donors are structuring hedging instruments to mitigate the foreign currency risks. For example, the International Finance Corporation (IFC) offers currency swaps to allow clients to transform existing or new foreign currency liabilities into local currency.
    14. 14. Agenda1. Risk-Related Issues in Microfinance2. Traditional Options to Reduce Foreign Exchange Risk3. Other Mechanisms3.1 Improving MFIs Access to Local Financial Markets3.2 Improving MFIs access to Local Capital Markets3.3 Tapping International Capital Markets
    15. 15. Improving MFIs Access to Local Capital Markets (I)Guarantees to bond issuance ME SME ME SME SME ME Microfinane Instituion/ Institution/ ME SME SME Bank ME SME Bond Microcredits Issuance Local SME ME investors Pension SME ME Funds Portfolio Micro SME ME of credit Microcred portfolio its or SME ME SME loans ME SME Debt service guarantee EIB Investment Guarantor Facility
    16. 16. Improving MFIs Access to Local Capital Markets (II)Local microfinance securitisation MFI MFI Senior Senior ME ME SPV ME SPV ME Purchase Issuance of of ABS microcredi ME t portfolio ME Microcredit Mezzanine Mezzanine portfolio ME ME Junior Junior Investment or Investor or Debt service Investor or guarantor guarantor guarantee (Donor) (Donor)
    17. 17. Agenda1. Risk-Related Issues in Microfinance2. Traditional Options to Reduce Foreign Exchange Risk3. Other Mechanisms3.1 Improving MFIs Access to Local Financial Markets3.2 Improving MFIs access to Local Capital Markets3.3 Tapping International Capital Markets
    18. 18. Tapping International Capital Markets (I) increasing number of institutions willing to fulfil certain Corporate Social Responsibility (CSR) requirements increasing number of socially responsible individuals are interested in investments and vehicles that combine financial returns and positive social impactMicrofinance as interesting opportunity for this type ofinvestors: it is increasingly moving from a pure development tool to a potential new asset class provides both a financial return and a positive social impact
    19. 19. Tapping International Capital Markets (II)Private Equity Funds allow linking international investors with MFIs are equity funds. invest in MFI, improving its capital base and providing the soundness required to further mobilise debt funding MFIs are not exposed to exchange risk as equity investments are in local currency risk is absorbed by the fund and reduced by the country and currency diversification as investor’s participations in the fund are usually in hard currency
    20. 20. Tapping International Capital Markets (III)Microfinance debt funds allow diversifying the risk by providing loans to MFIs in different countries in selected local currencies risk might be reduced by the portfolio approach as movements in one currency might be offset by movements in another exposures to each individual currency should be limited to a certain percentage of the total portfolio some of these funds can also hedge exposures through swaps when available bonds in the local currency of the loan to the MFI to fund the local currency financing can be issued – BVVA – Dexia
    21. 21. Tapping International Capital Markets (IV)Cross border microfinance securitisation ME ME MFI 11 ME MFI ME Micro-finance ME loans ME Special Special Senior Purpos Senior Purpos ME Vehicle ME Funding Vehicle granted to ME MFI 22 the MFIs ME MFI Micro-finance Mezzanine ME loans Mezzanine ME ME ME Junior Junior MFI (...) ME MFI (...) ME Micro-finance Debt service loans guarantee or ME Investment ME Investor or Investor or Guarantor Guarantor (donor) (donor)
    22. 22. Tapping International Capital Markets (V)Creating a international fund proposing hedgeinstruments Donors are exploring other mechanisms to solve the problem in a sustainable manner two sample projects: TCX and MatchTCX partnership structured by FMO to pool local currency exposures with other donors and investment partners Main benefits – more efficient management of forex risk – a faster and deeper diversification; – improvement of terms available for this activity – a professional and specialised management team
    23. 23. Tapping International Capital Markets (VI)IFC Matching Assets Through Currency Hedging (Match) IFC is working on creating a global fund to provide local currency hedges for loans disbursed by IFC will begin as a pilot project capitalised with USD 30 million, which is expected to facilitate between USD 100 to USD 200 million of local currency loans. Initial focus will be on microfinance, health and education, and SME projects
    24. 24. Tapping International Capital Markets (VII)Funds targeting Second tier and rural MFIsRural Impulse Fund (RIF) Majority of existing microfinance investment vehicles targets urban MFIs RIF makes debt and/or equity investments in MFIs which provide financial services to the rural poor RIF focusses on rural MFIs with at least 20% of clients in rural areas contributes to the alleviation of poverty in rural areas underserved by the microfinance industry (especially in sub-Saharan Africa) expected to promote the expansion of urban MFIs into rural areas complements existing microfinance investment vehicles by
    25. 25. Your Experiences and IdeasExperiences from the working group-Challenges-OpportunitiesOther instruments not mentionedOther ideas Thank you for your kind attention.
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