Download - Community Call Currency Risk V1

Kiva Community Call:Currency Risk Proposal

Equitable Sharing Between Kiva Partners &

Kiva Lenders

March 2009

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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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• 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


• Repayment USD $1,000

1 LCU = 0.7 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


• 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



• 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




• 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 Country

Country Kenya




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




United States



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 Country

Country Kenya




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




United States



United States

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About the Country

Country Kenya



Currency U.S. dollars

Currency Risk None(What’s this?)

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




United States



United States

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Contents




• 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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Me Avg. Kiva User

Total Loaned

Total Repaid

+ Delinquency Rate

+ Default Rate

Simplified First View

(consistent w/ Risk Stats

page)

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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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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




• Q&A