Which type of currency – local or hard currency – is most suitable for an MFI investment?
Local currency investments in MFIs reduce the costs and risks involved for the MFI, and are becoming more common than they once were. Recognizing the benefits for both investors and MFIs, investors have undertaken initiatives to eliminate foreign exchange risks. For example, The Currency Exchange Fund (TCX), launched in September 2007, offers long-term local currency hedging options to emerging market investors. The Fund includes a number of partners ranging from international financial institutions to commercial banks, and has secured circa $470 million to date. With a partnership like this, the lender will benefit with a lower credit risk, and the borrower will benefit with a lower business risk and lower cost of funding.
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