MFX Solutions, a Washington D.C. based provider of currency hedging services to impact lenders in developing countries, has received a $120m guarantee increase from the Overseas Private Investment Corporation (OPIC).

MFX provides currency hedging services to impact lenders in developing countries to help lower the risks of development lending and make it more sustainable. 

This guarantee increase will allow MFX to expand its hedging portfolio with investors in micro, small, and medium enterprise (MSME) finance, clean energy, affordable housing, and sustainable agriculture. 

Brian Cox, President and CEO of MFX Solutions, said: “All of our clients still have to be impact investors or borrowers, but we now have a broader definition of who we can work with. Since our guarantee are backing hedges rather than actual loans they can be leveraged quite a bit, so we expect this increase in our guarantee to unlock $1bn or more of additional hedging.”

The guarantee increase comes on top of an existing $48m guarantee from OPIC and a parallel $20m guarantee from the Dutch development bank FMO, totaling $168m.

By enabling MSME intermediaries and others to borrow in their own currency, MFX facilitates private capital flow into markets globally that would otherwise be constrained by high local currency risk.

Allowing development loans to be made in local currency helps assure that borrowers are not wiped out when their currency depreciates.

The currency swaps and forward contracts that MFX offers offset the risk impact investors take when they lend in the local currency of their borrowers rather than in dollars or euros. 

Cox explained: “As an example, we would hedge a loan in KES from a microfinance fund in, say, France to a microfinance bank in Kenya.” 

“The hedge allows the fund to lock in the return on its loan in euros or dollars even if the KES were to depreciate.  This makes it less risky to lend in KES,” he told Africa Global Funds.

Cox said that about one quarter of the hedges in MFX’s portfolio are in Africa (XOF, KES, NGN, UGX, TZS, RWF, ZAR, MWK, GHS, and ZMW). 

“Since these are some of the hardest currencies to hedge, this is where we can really add a lot of value,” he said.

He added that hedging with banks, especially at longer tenors is very difficult in a lot of African currencies: “It also can tie up a lot of liquidity to cover collateral requirements.”  

“MFX is able to hedge in almost any currency thanks to its partnership with an exotic currency risk pool in Holland called TCX and with a number of international banks. The OPIC guarantee allows us to hedge with clients without requiring high levels of collateral. This makes hedging and thus local currency lending much easier,” he said.

MFX was formed in 2009 by major microfinance lenders, investors, raters, networks, and foundations. 

Eliza Erikson, Venture Partner at Omidyar Network and chair of the board at MFX, added that OPIC’s new commitment to MFX is a major milestone. 

“When Omidyar Network made its initial investment in MFX, it was based on the premise that making currency hedging easier would spark a positive shift in the way impact lending is done. The continued growth of MFX and demand for its products confirms that premise,” she said.