06 Aug 2015   

Changing the world, one transfer at a time

NGOs may not seem the most typical participants in the foreign exchange market, but they require the same currency strategies as international businesses. How to procure emerging market currencies and volatile exchange rates are issues affecting NGOs, and getting it wrong comes at a high price.

There are approximately 1.5 million NGOs in the US (HumanRights.Gov) and this number is only set to grow over the next five years. The recession proved a mixed blessing, with the drop in charitable giving causing NGOs to look for more cost effective and innovative ways of managing both risk and currency.

Estimates show NGOs trade at least $6 billion a year on the foreign exchange market. However, whether you’re a small or large NGO, it is essential to implement an effective FX strategy in order to have the greatest impact.

Maximizing exchange rates

For small NGOs in particular, foreign exchange is a vital part of international operations. Lawrence Titterton, Chairman of Alongside Africa comments “It is important for all NGOs operating in developing countries to maximize the foreign exchange rates that they can achieve, and this is particularly relevant for small NGOs.  Whilst the overall values may be lower, the impact on local operations and on the income and expenditure account can be proportionately much higher.”

The currency market is a volatile environment, so how can NGOs address these challenges and are banks really the best partners?

There are numerous challenges involved in procuring currency, particularly for those operating in volatile markets where the exchange rate is influenced by less predictable economic and political pressures. For example the local currencies in Turkey and Argentina are prone to sudden and unpredictable fluctuation.

The countries beset by volatile currencies are typically ones that often require the most attention from NGOs. To ensure maximum impact it is vital to understand the level of risk and steps required to ensure effective aid delivery. Whether you’re a large international NGO or a small one, all face the same issues with currency in emerging markets. Smarter procurement can mean better deployment.

 

Cost of available service

Whenever a US NGO transfers money overseas, the process is often the same. Funds are being sent in Dollars and then converted into the local currency, on the ground, at the final destination. The conversion will be made at the Spot rate as a one off payment, potentially costing NGOs a significant and avoidable sum.

For example, if you were sending funds to a project in Burma and they convert the money into the local Kyat currency, you have no protection from rate fluctuation or local bank changes. If the rate has changed, between the time you sent the funds and the point they convert the currency, by 10% your NGO loses that money and is 10% less effectual on the ground. This potentially translates into a 10% drop in essential vaccines or 10% fewer hospital beds.

So where are banks in all of this? To them, everyone is a client whether they are an investor, corporation or NGO. As is often the case, many NGOs rely on banks to help them send money overseas, despite the fact that the level of service, local knowledge of the country, and rates, are rarely the most competitive.

Even NGOs that procure millions of pounds a year are often not prioritized, with exotic currencies, such as the Nepalese Rupee or Kenyan Shilling, not being made readily available at the best rate.

 

With all of these challenges in mind, procuring currency from a bank, without local knowledge or insight into the your NGO’s operations, is not the most efficient option. In many cases specialist providers with local market knowledge can offer a better service and more competitive rates, having the ability to allocate a larger portion of their time to your organization and its cause.

 

High donor expectations

Donors also have high expectations, with the majority of NGOs receiving substantial amounts in the form of restricted funds, to be used for a specific project or goal.  Provided in hard currency, funds are usually directed to the areas of greatest need, for example a country affected by a natural disaster, which is in economic turmoil and open to significant currency fluctuation.

Charitable giving has been steadily increasing as the economy emerges from the recession, with Charity Navigator reporting total giving in the US at $358.38 billion last year along. This is an increase of 7.1% from 2013 and the fifth straight year that giving has increased. Despite being a positive indicator of stability, NGOs must focus on reducing cost waste, with foreign exchange being an important factor that can provide substantial savings.

While every NGO’s needs vary, the general principle of foreign exchange remains the same. Just as the fundraisers work round the clock to raise the funds, the financial team must implement a strategy that ensures the funds are reaching the intended destination in the most cost effective and risk-free way.

With all of these challenges in mind, procuring currency from a bank, without local knowledge or insight into the your NGO’s operations, is not the most efficient option. In many cases specialist providers with local market knowledge can offer a better service and more competitive rates, having the ability to allocate a larger portion of their time to your organization and its cause.

 

Effective collaboration

Currency is a complex market, with real time analysis required before any transfer. Financial partners should be selected based on their expertise in the provision and risk management of emerging market currencies, fund distribution methods, and cost efficiency, now and five years in the future. They should be able to offer a wide range of exotic currencies from the Papua New Guinean Kina to the Ghanaian Cedi.

Value is not just about rates and deliverables; the chosen partner should be consistently reliable and efficient. It will soon become clear as to what is adding value and what needs addressing, to allow for forward planning and realistic allocation of resources.

The CFO can drive financial efficiency at all times, ensuring donations go further and creating maximum impact.

 

Estimates show NGOs trade at least $6 billion a year on the foreign exchange market. However, whether you’re a small or large NGO, it is essential to implement an effective FX strategy in order to have the greatest impact.

 

Protection against currency fluctuations

Comprehensive risk management tools are the surest way to protect your budget from movements in the currency markets.

This often takes the form of forward contracts, which is an agreement between two parties to buy or sell currency at a future point in time, for a rate agreed today. Effectively this sets the exchange rate at a stable level against with your NGO can budget with confidence. You protect funds against currency risk and sudden changes in the local economy.

For every NGO, it is vital to ensure that donations are stretched as far as possible and implementing a foreign exchange strategy – whilst often not an immediate consideration – can mean big savings.

Research, time, and a little perseverance can yield big savings, with every penny saved delivering greater impact for your beneficiaries. It’s important to accept that sometimes financial service providers really are here to help and can offer a tailored solution to needs of NGOs, which are often overlooked by banks.

 

Come and meet us at AIDF Global Disaster Relief Summit 2015, where our experts will be in attendance and we’ll be part of the panel on Electronic Payment Models For Aid Operations on Friday, September 11 at Ronald Reagan Building in Washington D.C.

We look forward to seeing you there!