Archive for 28 July 2009
When the Local Currency Falls, Microfinance Suffers
It has to be a devastating feeling to wake up one morning to find that 20% of your savings have vanished into thin air through no fault of your own. Unfortunately, that’s the reality that developing countries often have to deal with when their country’s financial systems are unable to keep the control over the value of their currency.
When I completed my Kiva Fellows placement in Tajikistan in early April, the local currency there was at around 3.80 Somoni to 1 USD. But something odd started to happen in the weeks to come. Somoni suddenly started to slide down and accelerated in May, until it hit its bottom on May 29th at 4.44 Somoni to 1 Dollar.
In other words, dollars suddenly became 17% more expensive compared to just 2 months earlier. Or 29% more expensive since the beginning of the year – just six months earlier.
Who’s Feeling the Impact?
What Happens When an MFI Grows Up?
Tamara Sanderson, KF8, Mongolia
Once upon a time, two NGOs named “the Golden Fund for Development” and “Gobi Start” came together to form their own commercial bank with a social mission. They decided to name themselves “the right bank,” with the hope that Mongolians could repay. Although all odds were against this new bank, it prospered at a time of economic uncertainty in Mongolia after the collapse of the Socialist system and overarching bankruptcy in the financial sector. Eight years later, this initiative has resulted in the largest microfinance bank in Mongolia and a role model for other MFIs (microfinance institutions) throughout the world.
When I first heard this story about XacBank, it seemed a bit like a fairy tale. Based on analysis from the MicroBanking Bulletin (MBB), it takes about 7 years, on average, for an MFI to become financially sustainable. Sustainable means that the MFI collects its loans and covers all its costs well enough to serve poor clients even after it does not get grants or soft loans from donors or government.
XacBank broke this norm. It was profitable from the very start.
Although this is great for XacBank, it logically leads to another question. If it is financially self-sufficient, why does it need Kiva? Shouldn’t the 0% interest capital go to other MFIs that need it more? (more…)
