Currency Risk

[Guest]

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[AccountAbility]

Dan, only downside risk would be shared.

Colette

[EDITED]
If Kiva is only looking at downside risk, where will the upside go and who will share in that?

Dan

[Robert]

This will result in a very complicated system. It will raise many more questions and complaints than during the PA2 introduction. I doubt that the Kiva system would benefit from it.

Just 3 negative consequences on the spot:

1.  The example on the slides assumes that there is just 1 final repayment. But in real life there are many instalments and the exchange rates fluctuate all the time. Are the 20% for each instalment or for the loan as a whole? In other words, is 80+80 the same as 79+81? If yes, the whole loan history must be recalculated for each repayment and no-one will understand what's going on. If no, lenders will feel betrayed as the overall gains and losses will be balanced, but the MFI gets the gains and the lender the losses. I'm afraid that this is counterproductive. The solution would be to issue loans in the borrower's currency. Then lenders would suffer the losses, but also earn the gains.

2.  MFIs operating in a weak currency environment will be at a comparable advantage in the Kiva system, compared with MFIs operating in strong currencies. MFIs operating in weak currencies charge higher interest rates to compensate for inflation, but the corresponding loss in exchange rates is passed on to the lender. Conversely, lenders will favour MFIs operating in a strong currency environment.

3.  Many deals are made between non-US lenders to non-US borrowers. The USD is just a transit currency. Yet, the problems discussed here are caused by the exchange rate fluctuations of the USD. Often lenders, whose currency is the euro or a currency that is de jure or de facto linked to the euro, lend to borrowers whose currency is linked to the euro: Bosnia and Herzegovina, (Bulgaria), Benin, (Côte d’Ivoire), Mali, Senegal and Togo. The obvious solution in theses cases would be to drop the USD. But Kiva’s solution is still USD-centred and doesn't solve the problem. The solution in this case is once again that loans are either denominated in euros or the borrower's currency.

However, lending in the borrower's currency is difficult under Kiva's system. Lending in different currencies involves different exchange rate risks, and this is usually addressed by different interest rate levels. On MyC4 loans in strong currencies pay lower interest rates than loans in weak currencies. Under the Kiva system where all loans earn the same interest rate (= 0), lenders would fight for loans in strong currencies and leave those in weak currencies on the shelves.

I have the feeling that in the long run, the MyC4 system will be favoured by non-US lenders, and that Kiva will be popular only with US lenders and, should the currency exchange risk be shared by lenders and borrowers in the suggested way, only with US-lenders who can cope with the repayment uncertainty.

Robert

[RichardF]

Richard, as this will be super helpful to us when figuring out what this will look like, can you unpack your thinking behind the notion of how this feature would mean that less money goes to entrepreneurs?

Gerard, I'll answer this in terms of how this might impact my own lending strategy.  Others' mileage may vary.

Pretty much from the start, I've thought of my capital risk of Kiva lending as "heads I lose, tails I break even."  Ultimately, this means any long term Kiva lending on my part means I will lose money.  The only uncertainties are how much and how fast.

Because it's impossible to earn any kind of monetary return from Kiva lending, a conventional return on investment (ROI) calculation will be somewhere between 0% and -100%.  That wasn't very psychologically satisfying to me, so I dreamed up a Payments Return on Investment (PROI) Index.  At least this way, I could have a chance of seeing my lending dollars show a positive, growing impact the more I was repaid and reloaded the same dollars.  For example, my personal PROI today is at 97% - I've loaned almost double the amount I invested.

I also don't have unlimited resources, so I actually set a lending limit for myself and have pretty much kept to it.  Within reason, I have and will replenish entrepreneur defaults, but I'm not particularly tolerant of FP causes of capital losses.  I've dodged the list of FP fiascoes, so far, but that's just another variation of Russian roulette.

I see assuming currency down side only risk as another version of "heads I lose, tails I break even."  That means if this scenario is implemented, my guaranteed loss rate can do nothing but accelerate.  As this happens, my personal PROI will slow down, or even drop, depending on the extent and rate at which I replace lost funds.  At some point I will either run out of Kiva relending capital or I will cut my losses and pull out whatever remains. 

Regardless of whether or not Kiva passes on currency risk to lenders, the ROI of 0% to -100% means the only way the Kiva model can survive is to maintain an influx of new lenders ready to lose their investments.  This very well may be the case, and very well may be a sustainable model.  It just means it won't include me, guaranteed, and likely many other lenders, some time down the road.  Adding currency risk to the mix simply hastens my departure.

[s_shewan]

This all seems really complicated to implement considering all the "bugs" that seem to occur over the "simplest" changes to the Kiva website.

So just a few questions (thoughts):

I was under the impression that the MFI's charged the higher interest rates to compensate themselves for the currency fluctuations.  So if Kiva lenders are going to absorb some of that discrepency does that mean that the MFI is going to decrease the amount of interest it charges to borrowers? 

And if Kiva lenders are going to be losing money because of currency fluctuations why shouldn't we be able to benefit when it fluctuates in our favour?  Seems like it should be a two way street.  We are already lending our money to the MFI interest free.

When are the fluctuations going to be calculated,  when the MFI receives payment from the borrower?every month on the 15th? or at the end of the loan term?

Who is going to keep track of the currency fluctuations day to day?  Kiva or the MFI?  And if the MFI, who is going to keep a check that they are not calculating it to benefit themselves?

This raises huge questions for me since I already have to deal with the Canadian $$  vs the US $$ when I am lending.

Susan

[romin]

This proposal is too complicated.  I am here to lend to entrepreneurs (not to speculate on currency movements - especially where the only outcome can be negative).  One of Kiva's attraction to me is its simplicity - even down to its uniform (zero %) interest rate.

The complicated bit should be managed by Kiva and its partners.  As far a currency bet, Kiva is a bet on dollar weakness (selling dollars and buying other currencies).  There should be a currency hedge put in place against dollar strength and possibly a reserve* built against adverse currency movements.

I believe this currency risk management should be centralised (much easier to audit) - and Kiva should charge partners a fee for protecting against currency losses.

* it may not be possible to hedge cost effectively against all currencies Kiva is exposed to.

But whatever the solution is, I don't want to complicate my Kiva experience with currency risk considerations.

[Jan & John]

I'm afraid I live by the KISS principle. 
And Kiva was very attractive to me for the very reason that the rationale behind Kiva *was* so very simple. 
Up to this point I have also done well convincing friends to join Kiva on the same basis. 

Money to the borrower - money back to me - with a risk that the loan might default.  So far I have been fortunate and in over 200 loans, I'm only out $18.75.  (not counting the conversion rate to Canadian $$

This is the job I have trusted Kiva to do.

I, however, still do not understand how Kiva comes up with the star rating system for the MFI's. 

How then could I ever hope to understand the currency risk? 

It's beginning to get a little over my head...

I think the priority last week was how to help Kiva itself become self-sustaining.

Is that not still an issue?  Or is that problem solved and now we're worried about the MFI's?

jan 

[YowieFreak]

The proposal will certainly encourage people to prefer lending to shorter-term loans, because the further into the future you go, the greater the probability that the stop-loss ratio will take effect.

I.e. it would take a 9.5% exchange rate "drift" per month to reach a 20% (for example) difference over 2 months, whereas it would only take a 0.8% exchange rate "drift" per month to reach the same 20% difference over 24 months.


Edit:  To correctly spell "ratio" 

[Visitor Number 1]

[EDITED]
If Kiva is only looking at downside risk, where will the upside go and who will share in that?

Dan

Slide #11 of the presentation indicates that any gains resulting from currency exchange will remain with the Field Partner.

I think it is unfair, especially for international lenders who are already assuming currency exchange risk converting to USDs, to ask the Kiva community to assume only the downside risk when the Field Partners are already getting capital interest-free.  As a result, I believe the majority of lenders will select only loans in which the MFI is willing assume currency exchange risk.

My guess is that enabling lenders to share in currency exchange gains would also introduce tax reporting requirements that would place an additional burden on Kiva.

[Mona]

After having slept one night over this, my mind on this topic is now really clear:

The risks I am really happy to take with open eyes are

• the risk of my individual borrower (otherwise I would not lend a large part of my money especially to people with disabilities or single parents or make loans longer than 20 months)
• the country risk (otherwise I would not lend to countries like Afghanistan, Palestine or Iraq).

A risk that is acceptable for me is the risk of the mfi. Of course no-one wants to be the victim of fraud or mismanagement, but as we are dealing with poor or very poor countries this risk is ok for me as long as it is minimized with all means kiva can take.

But I am not willing to take the currency risk based on my individual loans. What makes kiva such a phantastic concept is that it is not donating but loaning and that you get your money back with a really high probability.

• Small losses due to currency exchange rates (5%? 10%?) should be carried by the mfi, because they get the money from kiva and us lenders free of interest and charge in addition the 70% of their non-kiva borrowers with interest to cover exactly risks like this.
• For higher losses due to normal conditions or for mfi that do not charge interest from their borrowers (sorry, forgot which mfi this was, but there is at least one) kiva should use the means of the normal financial market like investment funds for emerging markets or insurances are using. I am sure you will find a company that will be happy to either explain to you how this is done or will maybe even support you on this. The Allianz e.g. has launched recently a microinsurance for families in India that will help them in cases of death, illness or natural catastrophes (sorry, found only a german version, but I am sure they will be happy to send you also something in English: http://www.allianz.com/de/presse/newsdossiers/mikrofinanz/news1.html)
• For losses that are caused by unexpected reasons like war or natural catastrophes I would be happy to donate a certain amount into a global emergency kiva fund you could use for all mfis (if you make it tax deductive for Germans maybe even a bit more  ). In addition, I would be also happy to be part of fundraisers for specific mfis that have run into serious troubles that they are not responsible for. If you see how willing people are to donate to Ghape to get a new software or to support florence school, don't you think they would help even more if e.g. the building of Ryada was damaged due to the Israel/Palestine war or maybe even if a mfi is getting bankrupt because they were deceived by single employees?

If you decide instead to put either a certain amount or even the complete currency risk on the shoulders of the lenders, the consequences for me would be to not invest anylonger new money and I would also withdraw a certain amount of what I have invested already. In addition I might feel tempted to make only shorter loans and maybe only to countries with a low currency risk. On the latter I am not sure yet, but I really hope that I don't have to really think about this in the future.

Please keep kiva just the concept we are all loving it for - giving people in need a helping hand by lending money to them, but with a high probability to get our money back.

Best wishes,
Mona

*Edit: here is an English version of the new Allianz microinsurance concept: http://knowledge.allianz.com/en/globalissues/microfinance/microinsurance/microinsurance_profile_india_intro/article596.html

[rasilva]

Thank you for your post, Natasha.  You have expressed my feelings exactly.

And mine too!... The MFI's support exchange rates risk when they get money from every international funding source, not only Kiva. Kiva gives them the "bonus" of not charging interest rates... so why would we assume the risk? Isn't Kiva's "interest free" money a good reason for them to assume the same risk they assume when they get money from other international funding sources WITH INTEREST RATES?

As an international lender, i have exchange rates risk already (my local currency is EUR not USD) and i'm not willing to support more risks. I'm lending money, not donating money.