It has to be a devastating feeling to wake up one morning to find that 20% of your savings have vanished into thin air through no fault of your own. Unfortunately, that’s the reality that developing countries often have to deal with when their country’s financial systems are unable to keep the control over the value of their currency.

When I completed my Kiva Fellows placement in Tajikistan in early April, the local currency there was at around 3.80 Somoni to 1 USD. But something odd started to happen in the weeks to come. Somoni suddenly started to slide down and accelerated in May, until it hit its bottom on May 29th at 4.44 Somoni to 1 Dollar.

In other words, dollars suddenly became 17% more expensive compared to just 2 months earlier. Or 29% more expensive since the beginning of the year – just six months earlier.

Who’s Feeling the Impact?

The currency fluctuations typically have the greatest impact on those who have least control over the changes. It can be salaried employees, such as school teachers or office workers, earning a fixed income. The salary is almost always paid in the local currency, so the take-home amount of 600 to 1,200 Somoni per month ($150 to $300) is suddenly worth 15-20% less in their purchasing power.

But the business owners – those who are your typical micro-finance clients – suffer greatly, as well. Their inventory is often imported and has to be paid for in dollars, which suddenly become significantly more expensive. As a result, they are forced to pass down the cost increases to the consumers, at a time when the consumers can afford less and are even more mindful of their expenditures. The demand drops, so then some businesses are forced to sell their goods at cost, simply to stay afloat and keep some cash coming in.

Currency devaluation may not be so devastating, if the country has a stable export base and able to sell their goods abroad, since their exports would become cheaper and more desirable.   Unfortunately that’s rarely the case with developing countries, who lack the the infrastructure and a competitive edge in manufacturing and production.

In Tajikistan (and much of Central Asia), this problem is further exacerbated by the fact that their biggest source of foreign currency – remittances from Tajiks working abroad – has also declined greatly this year due to the world’s economic crisis. The situation has gotten  so bad that many of them are now unable to earn enough money for a ticket back home.

On top of it, as they say, when it rains it pours – literally. In May, heavy rains in Tajikistan resulted in floods that washed away homes, businesses and crops in several communities in the South of the country further devastating an already fragile ec0nomy.

Where Else Does This Happen?

Although Tajikistan has been been greatly feeling the impact of currency devaluation with a drop of 29% over a 6 month period, this problem is widespread in other countries as well.

In Kazakhstan, you could buy 1 dollar for 125 Tenge on February 4th. Two days later, on February 6th, it would wind up costing 152 Tenge. 22% increase over a 2-day period!

In Ukraine, the Grivna has been on a downhill slide for several months. On September 1st, 2008, the Dollar was 4.77 Grivna, while just 3 months later – on December 19th, it went up to 9.37 Grivna. 96% increase!

Even Russia – not exactly a developing country and a source of work for millions of migrant workers from Central Asia and Eastern Europe – has seen its currency lose value, as well. Over a course of 5 months – from September ’08 to February ’09, their currency went from 24.78 Rubles for 1 Dollar to 36.18 Rubles to 1 Dollar – 46% increase.

The Effect on Micro-Finance Institutions and Kiva

When the currency devalues, MFIs get hit hard – on all fronts. Most of them are funded by outside sources, primarily in dollars, but conduct their operations in the local currency. When the currency devalues, the debt obligations can become crippling. Coupled with higher-than-normal delinquency and default rates of their struggling clients, many of them may struggle to meet their own repayments.

As Kiva lenders with loans in the developing world, currency risk is a factor that you need to take into consideration. In most situations, the fluctuations are manageable, but in some cases  things can get out of control very quickly.

In times like this, Kiva becomes a very important source of funding for these organizations, as Kiva lenders are more tolerant and patient than any other funding source. It’s important to understand that the delinquencies and defaults can increase even in healthy MFIs with a stable portfolio of clients. But keep in mind, that your support of these regions as Kiva lenders is of great importance during these difficult times.

Since this is a big concern for all sides in the micro-finance sector, Kiva has recently launched a Catastrophic Currency Protection feature which helps protect the MFIs and their clients. To learn more, click here.



Boris Mordkovich is currently doing his 2nd Kiva Fellowship serving with Mol Bulak Finance, the first Kiva Partner in Kyrgyzstan. Previously having completed his first placement in Tajikistan, he is getting used to life and work in Central Asia.

If you’d like to learn more about Kyrgyzstan and support entrepreneurs in that region, please check out and join our new lending team – Supporters of Kyrgyzstan – http://kiva.org/team/kyrgyzstan. Team members will get special updates and information from the Kiva Fellow and the MFI.

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