What is currency risk?
Loans are provided to the field partner in USD but often disbursed to the Entrepreneur in local currency. Therefore, currency exchange risk exists as a result of fluctuations that may occur between the US dollar and the local currency during the term of the loan. For example, if the local currency depreciated in value against the US dollar, the amount of local currency needed to repay to original USD loan amount increases.
EIC’s approach to currency exchange risk allows field partners to choose one of two options.
NO – there is no currency risk to lender: Field partner takes currency exchange risk by agreeing to accept and repay loans in US dollars. In this situation, the field partner assumes the potential cost of currency fluctuations and this is often passed on to entrepreneurs in the form of higher interest rates. Risk adverse lenders are advised to lend to entrepreneurs where no currency risk exists.
YES – there is currency risk to lender: Field partner does not take currency risk and chooses to repay loan in local currency. This means that adverse fluctuations are passed on to the lender. This would mean that it is possible for an entrepreneur to fully repay their original loan amount yet the lender would be repaid less than their original loan.