Cygma, the new microfinance foreign exchange (FX) risk management group, believes that the current financial situation is driving people in the microfinance industry to use foreign currency hedging facilities. The organisation will be launching its FX hedging products for illiquid and difficult-to-hedge emerging markets currencies in the first quarter of next year. These will be executed directly by the firm without reliance on third parties, supported by its USD 50 million capital reserve fund.
Art Avedisian, the Executive Director of Cygma, explains that the volatility of currencies, especially those in frontier markets is making microfinance institutions (MFIs) wary of taking on foreign currency risk, despite the fact that offshore sources of funding could be more in demand if local sources of funding dry up due to the financial turbulence. Mr Avedisian reckons there are only 15-20 currencies practically available to hedge at the moment, but is expecting Cygma to offer 60 currencies, adding many more emerging market currencies to the list.
The new organisation, formed in January 2008 as an offshoot of Chatham Financial, a risk management group, has been designed purely to focus on microfinance. Chatham had become involved in the microfinance arena as part of the firm’s commitment to philanthropy, but realised been that the best support it could give was to develop its skills in the currency and risk management into a tailored and stand alone service for microfinance. The company took advice from responsAbility, Opportunity International and MicroVest in developing Cygma.
The business will be divided into three sections. The education section helps the whole industry including MFIs, microfinance vehicles (MIVs), governments and regulators understand about hedging and currency risks. The advisory segment helps specific clients, for example analysing FX risk exposure, evaluating hedging strategies and advising on efficient loan structures and will be primarily aimed at the MFI market.
The third section will be the hedge fund execution business, which will be primarily aimed at the MIV market, as it would “be better for the MFIs not to carry the foreign exchange burden at all,” explains Mr Avedisian. The aim of the service is to provide a hedging service which “picks up where the banks leave off” by providing a larger currency range and dealing with much smaller sums of money. Cygma will not outsource the service, but will use their own USD 50 million Luxembourg-domiciled fund to take on the hedge exposure, the money for which is currently being raised, primarily from the major international development banks.
By Amy Rennison
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