Foreign Exchange Risk in Microfinance: An Empirical Evidence

Abstract

Misunderstanding of the structure of microcredit interest rates remains a rich source of generating criticism against the industry high interest rates. Research has focused its attention on the cost structure of interest rates and recently on the macroeconomic and macro-institutional factors. While the cost structure is probably the most important determinant of interest rates, other factors matter too. This paper explores the risk of foreign exchange in microfinance. On average, MFIs that operate in countries with fixed exchange rate regimes tend to charge lower interest rates than those operating in countries with floating exchange rate regimes.

Keywords: microfinance, interest rate, economic development, exchange risk, financial intermediation

JEL Classification: G12, G23, F31, F63