Microfinance Experts Criticize Mexican Bank

Socially responsible investing has grown in recent years, with a special focus on microlending, which tends to be quite profitable. Compared with regular lending, microloans also have a very low risk of default -- in part because of the informality of the system.

For instance, clients of Compartamos' Crédito Mujer group are women who request loans to fund their small-business ventures -- for instance, selling food and clothing locally or making textiles to ship abroad. The women gather in small groups of 12 to 50 to review how their businesses are doing and what the next steps are in the lending process. If business is slow for one member, the others will assist her in repaying her share of the loans, and peer pressure leads to low default and delinquency rates.

Interest in socially responsible investments has surged as investors look for profitable opportunities that allow them to give back to the less fortunate or develop environmentally friendly technologies.

U.S. assets invested in socially responsible funds rose 18% to $2.71 trillion in 2007 from $2.29 trillion at the end of 2005, according to the Social Investment Forum. The group says that nearly one out of every nine dollars under professional management in the U.S. today is invested in a socially responsible manner.

Microlending has attracted increasing attention, as investors are "increasingly embracing international microfinance opportunities to promote positive social and economic development abroad," the group's year-end report says.

The World Bank's arm involved in microfinance -- called Global Call to Action Against Poverty, or CGAP -- says that several large firms, including Citigroup(C Quote), Credit Suisse(CS Quote), Deutsche Bank(DB Quote), Merrill Lynch(MER Quote) and Morgan Stanley(MS Quote), have also entered microfinance investments in recent years.

However, as Compartamos and its peers receive more scrutiny for their profit-seeking goals, investors who place social responsibility above returns may start moving assets into projects that don't make money by taking it from the pockets of needy citizens in the developing world.

Yunus advises investors and pension funds against putting their assets in poor countries and microfinance. It's too difficult to monitor deposits, he says, and currency fluctuations can affect returns.

"Lending becomes complicated when you're out of the country," he says, adding that "if you want to support microlending ... put your money into the [microcredit] bank."