Community Call Currency Risk V1
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Transcript of Community Call Currency Risk V1
Kiva Community Call:Currency Risk Proposal
Equitable Sharing Between 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 Kiva’s Model
– Lenders lend USD
– Borrowers borrow in local currency
– Kiva Partners are caught in the middle
Currency Risk
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Currency Risk
Kiva
PARTNERS
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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)
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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
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• 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
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• 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
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• 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
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Loan is Stop-Loss Protected1 USD = 1.43 LCU - Stop-Loss1 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-Loss1 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
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• 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
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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%
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Data from Kiva Portfolio – Assumes Bullet Maturity
Top 10 Devaluations
2008 Lender
LossX=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%
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%
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Contents
• Currency Risk Overview + Proposal
• Mock Ups: Making a loan
• Mock Ups: Tracking your loan
• Q&A
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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 by Field Partner (What’s 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
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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 intendsto cover fully(What’s 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:
1. Entrepreneur Risk (Learn more)
2. Field Partner Risk (Learn more)
3. Currency Risk (see below)
Currency risk refers to….[KIVA WANTS YOUR IDEAS FOR WHAT SHOULD GO HERE.
PLEASE SUGGEST HELP TEXT ONWWW.KIVAFRIENDS.ORG AND 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.
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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 intendsto cover fully(What’s 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(What’s 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 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
19
Contents
• Currency Risk Overview + Proposal
• Mock Ups: Making a loan
• Mock Ups: Tracking your loan
• Q&A
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Include a “Repayment Status” - Active and not delinquent = “On schedule” - Active and delinquent
Hi Kiva Engineering Team,We'd like to give you a repayment update on the loans you've made through Kiva.A total of $14.30 has been repaid over the past month! As of 2009-02-20, you now have $15.71 in Kiva Credit in your account.Click here to re-lend, withdraw or donate these funds! (The minimum lending amount is $25, but you can easily add new funds
to existing Kiva Credit to complete a loan purchase.) https://www.kiva.org/app.php?page=account&_te=ruBelow is the repayment update on your Kiva Portfolio:-------------------------------------------------------------------------------Trinidad Rostran Mena in Nicaragua (Activity: Services) You Loaned: $25.00 Newly Repaid: $2.78Total Repaid So Far: $13.89 (55.56% of your loan)Repayment status: On schedule View loan profile at:http://www.kiva.org/app.php?page=businesses&action=about&id=53929&_te=ru-------------------------------------------------------------------------------Flor de Retama Group in Peru (Activity: Retail) You Loaned: $25.00 Newly Repaid: $4.17 Total Repaid So Far: $20.83 (100% of your loan)Repayment status: DelinquentView loan profile at:http://www.kiva.org/app.php?page=businesses&action=about&id=54364&_te=ru
To view your Kiva loan portfolio go to:https://www.kiva.org/app.php?page=account
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Example of what we should do for loans in Delinquent status
Status: Delinquent (See details)
$400 Loan Requested$200 Paid Back
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My Portfolio > Loans
Me Avg. Kiva User
Total Loaned
Total Repaid
+ Delinquency Rate
+ Default Rate
Simplified First View
(consistent w/ Risk Stats
page)
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My Portfolio > Loans
Me Avg. Kiva User
Total Loaned
Total Repaid
- Delinquency Rate
+ Amount of Active Loans Delinquent
Amount of Active Loans
- Default Rate
+ Amount of Ended Loans Not Repaid in Full
Amount of Ended Loans
2nd level (Consistent with
our Risk Statistics)
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My Portfolio > Loans
Me Avg. Kiva User
Total Loaned
Total Repaid
- Delinquency Rate
- Amount of Active Loans Delinquent
Delinquency caused by Entrepreneur
Delinquency caused by Field Partner
Delinquency caused by Currency
Amount of Active Loans
- Default Rate
+ Amount of Ended Loans Not Repaid in Full
Default caused by Entrepreneur
Default caused by Field Partner
Default caused by Currency
Amount of Ended Loans
3rd level
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Contents
• Currency Risk Overview + Proposal
• Mock Ups: Making a loan
• Mock Ups: Tracking your loan
• Q&A