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Foreign Exchange Risk Mitigation Techniques in Microfinance Industry

Author

Listed:
  • Elena Fuior

    (Finance and Banking Department, Cooperatist-Comercial University of Moldova,)

  • Veronica Mîrzac

    (Cooperatist-Comercial University of Moldova)

Abstract

Many borrowing microfinance institutions (MFIs) are not adequately managing their exposure to foreign exchange rate risk. The microfinance industry has increased its awareness and understanding of foreign exchange risk, however, there has not been any significant actions taken at the industry level. The best solution for an MFI is to avoid foreign exchange risk altogether and fund itself in local currency. There a number of strategies to accomplish this: Borrow from your local bank; Negotiate local currency loans from international lenders; Access local capital markets; Establish Policies on Foreign Exchange Management and Exposure; Use guarantees to increase local currency financing; Define foreign exchange risk tolerance levels; Negotiate back-to-back loans; Measure and monitor foreign exchange exposure; Index local currency lending.

Suggested Citation

  • Elena Fuior & Veronica Mîrzac, 2008. "Foreign Exchange Risk Mitigation Techniques in Microfinance Industry," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 42(5-6), pages 74-85.
    • Handle: RePEc:blg:reveco:v:42-43:y:2008:i:5-6:p:74-85
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