Economic Exposure of Microfinance Institutions

The largest source of funds for Microfinance institutions (MFIs) remains hard currency loans and donations. Since MFIs must make loans denominated in local currency, they are immediately exposed to foreign exchange rate risk. Furthermore, these institutions operate primarily in developing countries where the risk of local currency devaluation is the highest. Foreign exchange (forex) risk management remains a significant problem for any international financial institution, but the problem is that much greater for MFIs that are forced to borrow abroad and operate in unstable economies. These risks prevent access to many potential funding sources.