Foreign Exchange and Disaster Risk Management in Microfinance Institutions

Master's Thesis , 2008 , 89 Pages , Grade: 1,00

Business economics - Banking, Stock Exchanges, Insurance, Accounting

Microfinance Institutions (MFI) have left the role of altruistic instruments for donor-assistance and turned into profitable financial institutions and interesting investment opportunities for international financial investors.

However, well-intentioned investments can dramatically increase a MFIs risk exposure and institutions without proper risk management can easily be forced into closure in the aftermath of environmental or economical distress.
Moreover MFIs operate predominant in developing countries counting for 94% of all natural disasters worldwide and the vulnerability of their clients is exorbitant high due to their establishment in simple accommodation facilities and the strong dependence on agricultural business.

Foreign exchange and disaster risks are considered to be two of the most jeopardising threats for MFIs characterised by close interrelations and ignored by the majority of institutions, investors and credit users.

This work compiles a holistic risk management approach starting with the sound assessment of foreign exchange and disaster risks with the aid of modern tools such as hazard modelling and the value-at-risk model.
Based on the institutions particular risk-bearing capacity different strategies to minimise and transfer these risks have been evaluated. More than twenty methods from operational hedges to innovative instruments like indexed weather derivatives or currency and catastrophe swaps are investigated concerning their availability, applicability, effectiveness and efficiency in the microfinance context.
Furthermore this work seeks to design the strategies in a way that overcomes particular obstacles like the Samaritans dilemma to create sustainable security along with rising self responsibility. Consequently the employed instruments have been modified regarding their trigger concepts and payment schemes.
As the implementation of many useful tools would be hampered due to the MFIs size, pooling alternatives between MFIs have been analysed as well as cooperation models with international companies or public private partnerships.

In interviews with global experts from MunichRe, SwissRe and FMO specific issues have been discussed and the feasibility of the strategies could be affirmed.

This work can provide useful guidance for risk managers, investors, donors and all persons that are directly or indirectly responsible for the sustainable development of one or several microfinance institutions.

Inhaltsverzeichnis (Table of Contents)

• INTRODUCTION
  • ECONOMICS OF MICROFINANCE INSTITUTIONS
  • OVERVIEW ABOUT THE FOLLOWING CHAPTERS
• RISK IDENTIFICATION AND ASSESSMENT
  • OVERALL RISK MAPPING IN MFIS
  • ANALYSIS OF DISASTER-RELATED RISKS
    • INTRODUCTION TO DISASTER RISKS
    • DISASTER-RELATED RISK MAP
    • ASSESSMENT OF DISASTER-RELATED RISKS
  • ANALYSIS OF FX-RELATED RISKS
    • INTRODUCTION TO FX RISK
    • FX-RELATED RISK MAP
    • ASSESSMENT OF THE RISKS IDENTIFIED
    • EXCHANGE RATE SYSTEMS AND DOLLARIZATION
  • MOST COMMON TREATMENT FOR FX AND DISASTER RISK
• DISASTER RISK MANAGEMENT
  • INSTITUTIONAL DISASTER PREPAREDNESS
  • TRIGGER CONCEPTS AND PREREQUISITES FOR THE RISK TRANSFER
  • EVALUATION OF EXISTING FINANCIAL INSTRUMENTS
    • CATASTROPHE BONDS
    • WEATHER DERIVATIVES
    • CONTINGENT CAPITAL / CONTINGENT CREDIT
  • TACKLING DISASTER RISK ON HIGHER OR LOWER LEVELS
    • DISASTER-MICROINSURANCE
    • DISASTER LOAN FUNDS
    • PUBLIC-PRIVATE-PARTNERSHIPS
• FOREIGN EXCHANGE RISK MANAGEMENT
  • SUSTAINABLE RISK ACCEPTANCE
  • RISK AVOIDANCE STRATEGIES
  • RISK MITIGATION STRATEGIES
    • CURRENT PRACTICES: OPERATIONAL HEDGES
    • EVALUATION OF FINANCIAL INSTRUMENTS
  • INNOVATIVE CONCEPTS
• CONCLUSION
• APPENDIX I
• APPENDIX II
• APPENDIX III
• APPENDIX IV
• APPENDIX V
• BIBLIOGRAPHY
  • A) Non digital sources
  • B) Digital sources
• TABLE OF INTERVIEWS

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This book aims to provide a comprehensive analysis of foreign exchange and disaster risk management in microfinance institutions (MFIs). It explores the specific challenges MFIs face in managing these risks, particularly in developing countries. The book examines the economic context of MFIs, identifies and assesses various risks, and proposes strategies for effective risk management.

• Risk identification and assessment in MFIs
• Disaster risk management strategies for MFIs
• Foreign exchange risk management strategies for MFIs
• The role of financial instruments in mitigating risks
• The impact of exchange rate systems and dollarization on MFIs

Zusammenfassung der Kapitel (Chapter Summaries)

The book begins by introducing the economic context of MFIs and outlining the key risks they face. It then delves into a detailed analysis of disaster-related risks, including their identification, assessment, and potential impact on MFIs. The book explores various disaster risk management strategies, including institutional preparedness, trigger concepts, and the evaluation of financial instruments like catastrophe bonds and weather derivatives. It also examines the role of microinsurance, disaster loan funds, and public-private partnerships in mitigating disaster risks.

The book then shifts its focus to foreign exchange risk management, outlining the challenges MFIs face in managing currency fluctuations. It explores various risk management strategies, including risk avoidance, mitigation, and the use of financial instruments like forward contracts and options. The book also examines the impact of exchange rate systems and dollarization on MFIs and proposes innovative concepts for managing FX risk.

Schlüsselwörter (Keywords)

The key words and focus themes of the text include microfinance institutions, disaster risk management, foreign exchange risk management, financial instruments, catastrophe bonds, weather derivatives, microinsurance, disaster loan funds, public-private partnerships, exchange rate systems, and dollarization. The text explores the challenges and opportunities for MFIs in managing these risks, particularly in developing countries.

• College: Wiesbaden University of Applied Sciences
• Course: International Finance
• Grade: 1,00
• Author: Diplom-Betriebswirt Jan-Hendrik Boerse (Author)
• Publication Year: 2008
• Pages: 89
• Catalog Number: V115636
• ISBN (eBook): 9783640220243
• ISBN (Book): 9783640222582
• Language: English
• Tags: Foreign, Exchange, Disaster, Risk, Management, Microfinance, Institutions, International, Finance