Community Call Currency Risk V1

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Transcript of Community Call Currency Risk V1

  • 1. Kiva Community Call: Currency Risk Proposal Equitable SharingBetween Kiva Partners & Kiva Lenders March 2009

2. Contents

  • Currency Risk Overview + Proposal
  • Mock Ups:Making a loan
  • Mock Ups:Tracking your loan
  • Q&A

3.

  • Real Cost to Kiva Partners
  • Results from Kivas Model
    • Lenders lend USD
    • Borrowers borrow in local currency
    • Kiva Partners are caught in the middle

Currency Risk 4. Currency Risk Kiva PARTNERS 5. Loan is Made

  • 1 USD = 1 LCU
  • Kiva Lenders
  • Lend USD $1,000
  • 1 LCU = 1 USD
  • Kiva Partner
  • Lends 1,000 LCU
  • (USD 1,000 x 1 LCU/USD)

6. Loan is Repaid

  • 1 USD = 1.43 LCU
  • Kiva Lenders
  • Lend USD $1,000
  • Repayment USD $1,000
  • 1 LCU = 0.7 USD
  • Kiva Partner
  • Lends 1,000 LCU
  • (USD 1,000 x 1 LCU/USD)
  • Repayments of LCU 1,000 now worth USD $700
  • ( LCU 1000 x 0.7 LCU/USD)
  • Needs USD $300 to repay Kiva Lenders
  • -$1,000 - $700 = $300
  • -Currency Loss for Kiva Partner

7.

  • Local Currency worth less in USD
    • LCU = 1 USD on Disbursal
    • LCU = 0.7 USD on Repayment
    • LCU has devalued by 30%
      • (Original Value 1 New Value 0.7)/(Original Value 1)
    • Exchange Rate Loss
  • Kiva Partner
    • Must find additional funds to repay Kiva Lenders
    • Financial Burden on the Micro Finance Institution

Devaluation Local Currency Depreciates 8.

  • Pass Risk to Borrowers
    • Increased Interest Charges
    • Unfair to Kiva Entrepreneurs to suffer this loss
  • Hedge Currency Risk
    • Not Available or Too Expensive in many countries
  • Absorb Losses
    • Compromises financial health of Kiva Partner
    • Makes Kiva value proposition less attractive

Exchange Loss Options for Kiva Partner 9.

  • Kiva Lenders absorb currency risk above X% Depreciation
  • Kiva Partners would never have an exchange loss greater than X%
  • Example:Assume X = 20%
    • 1 LCU = 1 USD
    • Maximum Devaluation is 1 LCU = 0.8 USD
    • Minimum Value for LCU = 1.25 (if 1 LCU = 0.8 USD, 1 USD = 1.25 LCU)

Kiva Lenders Stop-Loss Currency Risk 10. Loan is Stop-Loss Protected

  • 1 USD = 1.43 LCU
  • - Stop-Loss
  • 1 USD = 1.25 LCU
  • Kiva Lenders
  • Lend USD $1,000
  • Repayment USD $875
    • $700 Borrower Repayments
    • $ 175 Partner Currency Loss
    • $ 125 Loss to Kiva Lenders from the Stop Loss Protection
  • 1 LCU = 0.7 LCU
  • - Stop-Loss
  • 1 LCU= 0.8 LCU
  • Kiva Partner
  • Lends 1,000 LCU
  • (USD 1,000 x 1 LCU/USD)
  • Stop Loss Maximum Repayment based on 1.25 LCU/USD
    • Maximum Repayment is$ USD 1,000 x 1.25 USD/LCU = 1,250 LCU
    • 1,250 LCU x 0.7 LCU/USD
    • =$ USD 875

11.

  • Losses could be substantial
    • Depends on Foreign Exchange Movements
    • Lenders take all losses in excess of a X% LCU devaluation
  • Not Symmetric since:
    • Foreign Exchange Gains remain with Kiva Partner
    • Not cumulative loss on loan
      • Loss on each Repayment
      • Possible Kiva Partners realizes exchange gain in one month and Kiva Lenders take loss in another month

Impact on Lenders 12. Data from Kiva Portfolio In 2008 10% 15% 20% 25% Experience No Loss 69.8% 80.8% 92.2% 98.4% Less than 2% Loss 14.8% 13.9% 7.2% 1.4% Great than 2% Loss 15.4% 5.3% 0.6% 0.2% Past 5 Years 10% 15% 20% 25% Experience No Loss 93.4%96.7%98.1% 99.0%Less than 2% Loss 4.5% 1.9% 1.2% 0.5% Great than 2% Loss 2.1% 1.3% 0.7% 0.5% 13. Data from Kiva Portfolio Assumes Bullet Maturity

  • In 2008, 8 Kiva countries had devaluations large enough to create a loss for Kiva Lenders
  • Worst loss experienced would have been in Ukraine of
  • 24%

Top 10 Devaluations 2008 LenderLoss X=20% Ukraine -39% -24% Indonesia -29% -11% Mexico -28% -10% Kenya -25% -6% Pakistan -24% -5% Bosnia-Herzegovina -21% -1% Bulgaria -21% -1% Uganda -21% -1% Paraguay -20% 0% Samoa -19% 0% 14. Contents

  • Currency Risk Overview + Proposal
  • Mock Ups:Making a loan
  • Mock Ups:Tracking your loan
  • Q&A

15. About the Field Partner More on this Field Partner >> About the Country Country Kenya Avg Income $400 / year $25 there feels like $90 in the U.S. Currency Kenyan Schilling Currency Risk Not fully covered byField Partner( Whats this?)

  • Mock Up #1a:Display new About the Country box
  • Loan is NOT in USD and
  • FX Risk Sharing is ON

Lenders to this entrepreneur About Group Loans In a group loan, each member of the group receives an individual loan but is part of a group of individuals bound by a group guarantee. Under this arrangement, each member of the group supports one another and is responsible for paying back the loans of their fellow group members if someone is delinquent or defaults. Rene & Rosi SPOKANE, WA United States Neil Houston, TX United States Matthew Minneapolis, MN United States My Portfolio > Loans 16. About the Field Partner More on this Field Partner >> About the Country Country Kenya Avg Income $400 / year $25 there feels like $90 in the U.S. Currency Kenyan Schilling Currency Risk Field Partner intends to cover fully ( Whats this?)

  • Mock Up #1b:Display new About the Country box
  • Loan is NOT in USD and
  • FX Risk Sharing is OFF

Lenders to this entrepreneur About Group Loans In a group loan, each member of the group receives an individual loan but is part of a group of individuals bound by a group guarantee. Under this arrangement, each member of the group supports one another and is responsible for paying back the loans of their fellow group members if someone is delinquent or defaults. Rene & Rosi SPOKANE, WA United States Neil Houston, TX United States Matthew Minneapolis, MN United States

  • Currency Risk Help
  • When you lend on Kiva, you should consider 3 levels of risk:
    • Entrepreneur Risk( Learn more )
    • Field Partner Risk( Learn more )
    • Currency Risk(see below)
  • Currency risk refers to.
  • [ KIVA WANTS YOUR IDEAS FOR WHAT SHOULD GO HERE.
  • PLEASE SUGGEST HELP TEXT ON
  • WWW.KIVAFRIENDS.ORGAND WE WILL SCAN
  • IT FOR IDEAS WHEN CRAFTING THE FINAL LANGUAGE ]
  • To see how much money you would have lost if you lent 1, 3 or 5 years ago,click here .
  • For a video tutorial on currency risk,click here .
  • To ask other community members about their experience with currency risk,click here .

17. About the Field Partner More on this Field Partner >> About the Country Country Kenya Avg Income $400 / year $25 there feels like $90 in the U.S. Currency Kenyan Schilling Currency Risk Field Partner intends to cover fully ( Whats this?)

  • Mock Up #1b:Display new About the Country box
  • Loan is NOT in USD and
  • FX Risk Sharing is OFF

Lenders to this entrepreneur About Group Loans In a group loan, each member of the group receives an individual loan but is part of a group of individuals bound by a group guarantee. Under this arrangement, each member of the group supports one another and is responsible for paying back the loans of their fellow group members if someone is delinquent or defaults. Rene & Rosi SPOKANE, WA United States Neil Houston, TX United States Matthew Minneapolis, MN United States 18. About the Field Partner More on this Field Partner >> About the Country Country Kenya Avg Income $400 / year $25 there feels like $90 in the U.S. Currency U.S. dollars Currency Risk None ( Whats this?)

  • Mock Up #1c:Display new About the Country box
  • Loan is in USD

Lenders to this entrepreneur About Group Loans In a group loan, each member of the group receives an individual loan but is par