Abstract
Foreign currency debt (FCD) is an important refinance source of microfinance institutions (MFIs). However, it is associated with significant foreign currency risk because suitable hedging tools are scarce. We analyze the determinants of FCD that is held by MFIs worldwide. The results indicate that MFIs operating in countries with less developed financial markets and/or a higher foreign exchange rate volatility regarding the USD have lower shares of FCD. We cannot find any positive dependency structure between the FCD and the interest rate differential between the local currency and the USD. Surprisingly, this effect is even negative for Latin American MFIs. This evidence shows that MFIs do not follow a carry-trade-strategy which is typical for classical finance actors. Regarding MFI specific factors, the results indicate a positive influence of the financial performance on the MFIs' share of FCD, whereas social performance has a weak positive impact only for Asian countries.
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