As a lender, you might have noticed a smaller amount returned to your Lendwithcare account in repayments compared to your original loan amounts. The reason for this relates to a complex currency exchange process underpinning Lendwithcare.
It is worth keeping in mind that this small loss is to ensure the people we work with in low-income countries receive the full amount of their loan and are protected from foreign exchange rate fluctuations.
Lendwithcare is committed to positively impacting the lives of small business owners around the world. To achieve this goal, some elements of Lendwithcare are set up in such a way to protect the small business owners we seek to support and the local partners we work with. One such element is how we approach the complex currency exchange process. This process transfers your funds to Lendwithcare’s local partners and back again when repayments are made.
As you may already know, Lendwithcare works with local partners across many countries. Our partners are the ones on the ground disbursing the loans to the low-income entrepreneurs you have generously supported, who then borrow and make repayments in their local currency. However, because loans are made in GBP, any repayments made by entrepreneurs must also be returned to you in GBP.
As we know, exchange rates between GBP and other currencies can fluctuate over time and as recent events have shown us, even hard currencies, such as GBP and USD, are susceptible to fluctuations in their value. These fluctuations are much more frequent and pronounced in low-income countries where the value of local currencies is often driven down by political or economic uncertainty. This means that between the time when a loan is first made by you and when the final repayment is made by the entrepreneur you've supported, we can expect the value of any local currency to fluctuate. This can of course impact the amount you receive back.
For example, in January 2021 the PKR (Pakistani Rupee) to GBP conversion was £1 to 216.80 PKR. This would mean that £15 sent in January 2021 would convert to 3,252 PKR. If that loan were to be repaid over a period of 12 months, we might expect the final loan repayment to be made in January 2022. At this time, the PKR to GBP conversion was £1 to 238.63 PKR. This would mean 3,579.45 PKR would need to be repaid locally to ensure that exactly £15 was received back. This is roughly an increase of 10% in repayments, a loss we feel would be unfair to pass on to our local partners and the entrepreneurs they support.
To provide stability to our partners and the small business owners they support, all repayments due are fixed at the outset, in the local currency of the loan.
When currencies depreciate against GBP, the value of the currency repayment received will be lower than originally expected. Unfortunately, many of our partners have seen a decline of their currency against GBP over the last 2-3 years. This could be due to local economic and political uncertainty, resulting in a loss in confidence of the currency in question.
There is little we can do about this as Lendwithcare, but we understand why these losses are concerning on initial inspection. We sincerely appreciate the life-changing support provided to low-income entrepreneurs through the Lendwithcare community. And we understand that lenders are driven to support as many hard-working people as they can through recycling loan funds. However, it is important to us that we continue to provide 100% of the loan request to the individuals and communities we seek to serve, and that our partners are not exposed to potentially very high foreign exchange rate costs that would impact on their ability to continue operating.
Supporting low-income entrepreneurs through Lendwithcare will always carry a level of risk. While we work hard to bring that level of risk down, unfortunately all risk cannot be eliminated. Even though the average loss due to exchange rate fluctuations is just 3%, there are ways lenders can reduce the risk of currency exchange losses themselves. This could include supporting loans in a wider range of countries or making loans on a more regular basis so that loans are made at a different point in the exchange rate cycle to the GBP.