Pilar Ramirez, Finding Solutions to the Currency Risk Challenge for MFIs, Investors and Donor Agencies
FINDING SOLUTIONS TO THECURRENCY RISK CHALLENGE FOR MFI’s, INVESTORS AND DONOR AGENCIESGLOBAL MICROCREDIT SUMMIT 2011 Valladolid, Spain Pilar Ramirez CONFIE Holding SL
LOCFUND: a response to Market Needs Local currency funding to MFIs that offer financial services to low-income people managing microenterprises and do not have access to commercial banks. 400 MFIs in LAC region. International funding for MFIs is still mainly in hard currencies, while microcredit clients deal in local currencies. LAC countries have not developed efficient derivative markets.
LOCAL CURRENCY LENDING APPROACHProviding local currency denominated instruments to MFIs in theregion that are usually funded in hard currency and whose clientsdeal with local currency.Approval of loans after a rigorous due-diligence process of the MFI,specially designed by Locfund.Technical Support to the MFI in Asset and Liability Management andFX Risk Management.Very close post disbursement follow-up of the MFI.LOCFUND manages the FX risk through currency diversification of itsportfolio and uses hedge tools when necessary and where available.
A SUCCESSFUL CURRENCY DIVERSIFICATION MODEL:LOCFUND manages the foreign exchange risk through a portfolio of assets in various local currencies. This has generated positive results in normal times and has helped to avoid losses during crisis periods, based on three main elements:1. Investment policies that ensure low concentration in a single currency, low concentration in the structure of each loan repayment, and low correlation among the open positions in the different currencies that are part of its portfolio of loans.2. A structure of terms of each loan, where the most important element is the application of variable rates aiming to follow trends in the local markets.3. Application of FX forward transactions where available (in Perú and Colombia).
SUPPORTING ACTIVITIES1. Permanent analysis of foreign currency exchange systems in each country, ongoing analysis of volatility of exchange rates. It also monitors the correlation of exchange rates and conducts an ongoing analysis of macroeconomic trends in each country related to economic policies, interest rates, foreign trade and situation of their international reserves.2. Simulations of the components that may affect the market interest rates are made, and are compared to the variation of the expected exchange rate, and other elements, in order to have an estimate of the final return of each loan in US dollars during its maturity.IMPORTANT FINDINGS• When local currencies have re-evaluated vis a vis the USD, local interest rates have decreased; the opposite effect has occurred.• Average correlations in exchange rates among local currencies vis a vis the USD have been consistently low..
OPERATIONS and RESULTS:• Since its beginning in 2007, Locfund has completed 56 loan operations in local currencies in 35 second-tier MFIs in 13 countries of LAC, for a total of the equivalent of US$45 million to date.• Locfund currently has a portfolio of US$30.718mm in loan operations, in 12 different currencies.• Loans are structured based on the following factors: the country where the loan is placed, the MFI to receive the loan, and local market rates.• Variable interest rates for loan operations are adjusted every 3 months accompanying local market trends.• Average interest rates have been declining due to an overall improvement in risk in LAC countries, as well as a strengthening of local currencies.
• Locfund shows positive FX results in three of the four years of operations.• Locfund’s returns for its investors have been positive in the four years.• Portfolio return, including FX results for year 2010 has been 13.49%.• 2011 is showing increased returns. ROE of 14,3% as of June 2011. “The resulting total return of the portfolio is attractive for the investors and, at the same time, the loan operations are highly competitive in the local markets in each country”
Exposure per country as of June 2011 104 MFIs Costa Rica Paraguay 4,95% 7,69% approached and in Guatemala 3,52% different stages of Peru El Salvador 13,16% negotiation 4,62%Dominican Nicaragua Republic 0,73% 34 Microfinance 9,71% Honduras institutions reached 3,69% México Colombia Current portfolio 12,65% 13,08% size: USD 30,7MM Bolivia Argrentina Successful model for 2,66% 10,83% Ecuador small and medium 12,72% MFIs
Locfund LP Impact and Developmental ObjectivesUSD 45 MM were allocated in 56 loan operations to 34 MFIs in 13 countries Locfund provided 43 technical support processes to Microfiance Institutions focused on Assets and Liabilities Management and other areas.
Contact Information La Paz, Bolivia: Fernando Sánchez email@example.com Av. Sánchez Bustamante esquina Calle 15Edificio Torre Ketal, Piso 4 Oficina 404, Calacoto Phone: (591) - 2- 2799046 / 2-2113237 Fax: (591) - 2 - 2799290 San José de Costa Rica: Rodolfo Quirós firstname.lastname@example.org Centro Corporativo Plaza Roble, Edificio El Pórtico, Piso 1, Escazú Phone: (506) 2201-1492 Fax: (506) 2201-1414