MICROCAPITAL STORY: MFX Solutions Inc. (MFX) in Washington D.C., USA Launches Hedging Operations Dedicated to Microfinance Institutions (MFIs)

MFX Solutions Inc. (MFX), a new company based in Washington D.C. in the United States dedicated to providing microfinance currency risk solutions announced the launch of its hedging operations recently, according to a press release on the electronic news and information portal PR NewsWire. With the launch, MFX, in keeping with its mission to ‘make sure that existing flows of microfinance lending are not disrupted by currency devaluation’, will focus on making modern hedging instruments accessible to microfinance lenders in developing countries. As per information available on their website, MFX will focus on ‘high-risk markets in Africa and elsewhere where hedging can have a transformative effect’. Additionally, MFX will also create education programs in the form of easy-to-use web-based tools designed to help MFI managers analyze the risks they face under different economic scenarios. (PR Newswire is headquartered in New York, USA and is a subsidiary of the London based global business media company United Business MediaPlc).

MFX was established in October 2008 to provide microfinance lenders with the know-how to quantify currency risk in addition to providing them affordable and accessible hedging instruments to mitigate currency risk. Its establishment is the culmination of a three-year long collaboration of a group of microfinance lenders, investors, raters, networks and foundations who came together to address the problem of currency risk in the microfinance industry. Key players in the group responsible for the launch of MFX include the US based microfinance and micro-lending organization ACCION International, the US based non-profit community investment organization Calvert Foundation, the Canadian non-government organization (NGO) Calmeadow Foundation, the microfinance rating agency MicroRate and the non-profit organization Global Partnerships which funds MFIs in Latin America. In its first round of financing, MFX secured USD13 million from 17 investors. MFX investors include the Omidyar Network investing USD 9.3 million, Triodos-Doen and Hivos-Triodos Fund of the Netherlands with USD 1.5 million, ACCION International with USD 1.25 million, Incofin CVSO of Belgium with USD 500,000 and the Calmeadow Foundation contributing USD 320,000. Other investors include the Grameen Foundation, Calvert Foundation, Blue Orchard Foundation and Unitus among others; for a complete list of all investors please lookup the MFX press release.

MFX is headed by Mr. Brian Cox who serves as its Executive Director. Armed with a BA and MBA, both from the Stanford University, Mr. Cox’s prior experiences include running the Europe and Eurasia Division at the U.S. Treasury Department. Mr. Jorge Santisteban, a graduate from Universidad Panamericana, is MFX’s Director of Hedging Services. He has 15 years experience in currency risk management with various organizations including Banco Nacional de Mexico, the American Express Bank and Citi Private Bank.

MFX’s strategy revolves round its partnership with the Currency Exchange Fund (TCX), a USD 600 million initiative of the Dutch development bank FMO and the Dutch government. TCX offers lenders currency hedging in developing markets, where no commercial hedging option is available. Through investment in and partnership with TCX, MFX will offset its currency risk in its own balance sheet. MFX will provide hedging services not just to Microfinance Investment Vehicles (MIVs) and MFIs that invest in the company but also to non-investors provided they meet the credit and mission criteria of MFX; MFX also does not require collateral from clients that meet minimum credit standards. For MIVs, MFX relies on the rating methodology developed by MicroRate specifically to address the financial and business characteristics unique to MIVs. In the case of MFIs, based on information in the website, the credit score is determined based on ‘rating from one of the major microfinance industry rating services’; no further specifics on the MFI rating services considered by MFX are available. The instruments employed by MFX include a) Foreign Exchange Forwards which form a binding obligation for an exchange of funds at a future date locking in an exchange rate for a specific amount, and b) Cross Currency Swap involving an agreement between two parties to exchange principal and fixed rate interest payments on a loan in one currency for payments on an equal loan in another currency.

As per currently available information, the currencies for which MFX can provide hedging include a ‘majority’ of the currencies figuring in the OECD DAC 2006 list; MFX offers hedging of these currencies into dollars or euros. No further information on which currencies specifically can be hedged is currently available. (The OECD DAC list features the countries listed by the Development Assistance Committee as receiving Official Development Assistance (ODA)). MFX’s product pricing strategy will be based on the price at which it can re-hedge its own risk with TCX or a commercial bank, in addition to a spread to account for the credit risk of its clients; non-investors may be charged additional fees.

The current portfolios of MIVs are heavily weighted to Latin America and Eastern Europe, which account for roughly 80 percent of the total lending with Asia receiving only 7 percent and the Sub-Saharan African region accounting for 8 percent of the total lending. However, in a survey of MIVs by MFX, lenders state that with cost-effective hedging available, they would be willing to shift new lending toward Africa and other higher-risk markets. This, according to MFX, is indicative of the fact that providing lenders with the means to manage currency risk can fundamentally change lending patterns in the industry in favor of micro-entrepreneurs in the Africa and other underserved markets. Microcapital has previously reported on another such player involved in currency exchange risk management, for more details please lookup this story. To understand Dr. Mohammad Yunus’ take on microfinance institutions relying on foreign money, please lookup this Microcapital story where he talks about the dangers of foreign currency to MFIs.

By Bharathi Ram, Research Assistant

Additional Resources:

PR NewsWire: MFX Solutions Launches Service to Reduce Microfinance Currency Risk

MFX Solutions Inc: Home, About MFX, MFX Products

Microcapital Story: New Microfinance Foreign Exchange Risk Management Group, Cygma Believes Credit Crunch Provides Business Opportunity

Microcapital Story: Muhammad Yunus Warns of the Dangers of Foreign Currency at Sa-Dahn Microfinance Conference

Organization for Economic Co-operation and Development (OECD): Home, DAC