MICROCAPITAL BRIEF: Brian Cox Highlights Emerging Challenges for Microfinance Institutions (MFIs)

On August 30, 2010, Brian Cox, the president of MFX Solutions LLC, a company which offers currency hedging instruments, highlighted several emerging challenges that microfinance institutions (MFIs) face as they expand such as currency risks, tighter regulation, and tougher capital adequacy requirements in a recent interview with Microfinance Focus.

Mr Cox warned that a sudden change in the exchange rate between the local currency and an MFI’s borrowing currency could put the institution’s balance sheet at risk. He also pointed out that MFIs would face higher capital adequacy requirements and a more restrictive regulatory environment as they expand to become deposit taking institutions. Mr Cox’s commentary coincides with a final paper published recently by the Bank for International Settlements, an intergovernmental organization of central banks based in Basel, Switzerland, on core principles applicable to supervising MFIs, which could be found at: http://www.bis.org/publ/bcbs175.htm

About MFX Solutions LLC [2]:
MFX is founded in 2008 and offers non-deliverable swaps and forwards to Microfinance Investment Vehicles (MIVs) and to Microfinance Institutions (MFIs) which cannot deal directly with hedging organizations such as The Currency Exchange Fund (TCX). In a currency forward, two parties agree to exchange future payments in different currencies at an exchange rate that reflects expected future interest rates associated with the two currencies. A swap occurs when two parties exchange equal value loans in two different currencies with interest rates reflecting anticipated currency movement and institutional credit quality. In non-deliverable instruments, the principal or notional amount, of the hedge is not exchanged, which means parties only exchange the net difference between their positions. The organization has a USD 20 million guarantee from the Overseas Private Investment Corporation, an agency of the United States government acting to promote international economic development. To work with MFX, MFIs must also be rated by MicroRate, a MFI rating agency established in 1997.

By Trevor Kwong, Research Assistant

Sources and Additional Resources:
[1] Microfinance Focus: Microfinance Needs to be Funded By Local Currency Loans – MFX:
http://www.microfinancefocus.com/news/2010/08/30/microfinance-needs-to-be-funded-by-local-currency-loan-–-mfx/

[2] MicroCapital Universe: MFX Solutions LLC:
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=MFX+Solutions+LLC+(MFX)

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