Foreign currency debt provides additional access to capital and offers funds in favorable and
flexible terms to microfinance institutions (MFIs). Yet, we find that the use of foreign currency
debt, on average, leads to higher microcredit interest rates. We also find that MFIs operating
in countries with pegged exchange rate regimes and profit MFIs are better able to mitigate
foreign currency risk. The results of the paper suggest that local currency debt is a better
option for MFIs if the goal is to provide microcredit at lower interest rates.