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Microfinance and the financial crisis?
Question: With all this talk of the credit crisis, I'm wondering what's become of microlending and those microlending companies you've covered in the past. Maybe you could do a follow-up on some of them? Thanks, Spencer, Andover, MA
Answer: My suspicion is that microfinance will do well--and maybe even expand--during the financial crisis. Certainly that's the point of view of Muhammad Yunus, the founding father of microfinance. The modern microfinance business began when Yunus established the Grameen Bank in 1983. It offered very small loans to impoverished people, mostly women, to finance small business ventures. The Grameen Bank, which won the Nobel Peace Prize jointly with Yunus in 2006, now has a far more solid loan portfolio than many global commercial banks. In a recent interview with Business Week. Yunus said, "Our system is based on trust, not collateral or guarantees, and still the people pay back."
Swaminathan S. Anklesaria Aiyar agrees. A leading Indian journalist and consulting editor to the Economic Times recently wrote: "This is extraordinary. Big financiers lend against collateral, a back-up if their borrower defaults. But MFIs [microfinance institutions] lend with no collateral at all. Big financiers lend to the most creditworthy corporations. MFIs lend to poor women whom nobody in history considered creditworthy before. Yet, the secured loans to big corporations are bombing, while unsecured loans to poor women are being repaid in full."
The track record is good. The need is there. The microfinance world is one where very small sums can make a big difference. And for many people the lure remains: Even though most microfinance institutions are started with public or philanthropic money, or money from other sources, many eventually become self-sustaining, profit-making enterprises.
It's a story well worth following. Thanks.
About the author
Christopher Farrell is economics editor of Marketplace Money, a nationally syndicated one-hour weekly personal finance show produced by American Public Media.I am the head of a Central American microbank (Prisma MicroFinance, a Kiva supplier) and also the edit of the microfinance newspaper, the MicroCapital Monitor, and blog, microcapital.org. Thank you for this important discussion. If I may, I would like to also provide a few of the many articles that we have recently published on this same issue, which I will paste into following comments. I hope these are of utility.
The discussion about the purpose of microfinance has been ongoing since app. 2006, and it is intensifying. One group, with proponents like Muhammad Yunus, asserts that microfinance should serve primarily as a vehicle to help people, even if in a self-sustaing way; others, like e.g. the eBay founder Pierre Omidyar, maintain that microfinance, in order to be really successful, should also be profitable from an investor's point of view.
Several microfinance funds which invest directly into MFIs (local microfinance institutions) boast default rates of below 2%, consistent net returns of app. 5%, and very low volatility of app. 0,5%. This looks very attractive at times when even "AAA" investments blow up.
From an investment standpoint, microfinance seems to have very little correlation with the overall economy or the world financial system. Finance professionals call this "alpha", a statistical measure of performance of a financial asset independent from market movements. The only tangible risk factors are execution risk by the MFI and currency fluctuations.
From this perspective, microfinance could indeed be the first really "alternative" investment in the future.
As a microlender on <a href="http://www.kiva.org">Kiva</a>, I can attest that the money is still flowing and that I am still getting repaid on time, with plenty of reinvestment opportunities.
