The Seattle non-profit Global Partnerships has dollars to invest, but the microfinance institutions (MFIs) it's trying to help need money in local currencies. In the case of Honduras, it's easy to see why that gap is dangerous.

Global Partnerships has made several loans to organizations in Honduras, in dollars, and those organizations in turn lend money to poor entrepreneurs in local currency, the lempira. The ongoing political crisis has pushed an already weak Honduran currency to the edge of a major depreciation. In that case, the local organization will have to pay back possibly twice as many lempira as it borrowed, and pass the costs on to its borrowers.

"There hasn't been a credible mechanism to be able to hedge our loans so that the risk of depreciation is not absorbed by the poor borrowers this is supposed to be helping," said Gary Mulhair, chief investment officer at Global Partnerships.

Soon there may be a new solution to the risk of such currency fluctuations in the microfinance industry. Global Partnerships is helping to back a new company called MFX Solutions.

CHRIS MEGARGEE/GLOBAL PARTNERSHIPS

Silveria Champi Choque took a loan to help with a family business raising livestock in Peru. The lender, an NGO called Arariwa, received funding from Seattle-based Global Partnerships.

Its debut today is the result of a three-year effort involving more than 30 microfinance organizations from around the world, led by Global Partnerships, Calmeadow Foundation, ACCION International, Calvert Foundation and MicroRate.

MFX was created to apply modern hedging instruments to microfinance lending, analyzing and quantifying currency risk and mitigating that risk by trading among a basket of currencies. MFX also offers free Web-based risk management tools tailored to microfinance needs.

The initial backers are U.S. and European microfinance funds, networks, and foundations that have pooled their resources to set up MFX. In its first round of financing, MFX has secured $13 million from 17 investors, with Omidyar Network providing the biggest chunk: $9.3 million.

Other investors include Seattle-based Unitus, Triodos-Doen and Hivos-Triodos Fund of the Netherlands, Incofin CVSO of Belgium, ADA (Luxembourg), Grameen Foundation, Blue Orchard (Switzerland), Mecene/Africap, Microcredit Enterprises, Grassroots Capital, and Developing World Markets.

The Ford Foundation, The Currency Exchange Fund (TCX), The Dutch Development Bank FMO and USAID all contributed grant funding for MFX.

"Hedging goes on every day between very strong banks and companies," said Mulhair. Global Partnerships has tried to do such currency swaps with a bank, but "we're not big enough for banks to take us seriously."

With MFX, Global Partnerships may have to pay a higher cost up front to invest in places such as Honduras, he said, but ultimately it will have "less risky transactions, the cost will not be born by the micro-borrower, and we can do business with (microfinance organizations) we could not do business with before."