While lending in the subprime mortgage market in the U.S. has turned sour, the credit business at an even lower level of borrower is booming.
Microloans of as little as $50 and rarely more than a few hundred dollars are proving to be an effective remedy for world poverty. They are also becoming attractive investments.
Repayment rates are superb, rarely lower than 96%, with a track record that beats that of most commercial banks, and demand is soaring.
This double bottom line of business development and poverty reduction is gaining notice from the banking sector, especially in India, where
and others are actively supporting microfinance in ways that are likely to eventually bring in new regular accounts as poor families work their way up the economic ladder.
The consulting firm McKinsey & Co. estimates that as many as half of the 3 billion poor people in the world could be eligible for microloans. A recent report by the World Bank estimates that microfinance meets only around 15% of the credit needs of the world's low-income families. Microfinance is a growth industry.
Investors, including those who wish to make a profit while having a positive social impact in the alleviation of global poverty, are certainly taking notice of the attractiveness and effectiveness of microlending.
It is easy to see the natural affinity between microfinance and people who are involved in the financial markets. The key to solving world poverty is wealth creation.
Who knows the most about that? Not academics or politicians but businesspeople and investors. That was one of the key reasons why my co-author, Phil Smith, a successful oil and gas executive, and I wrote,
A Billion Bootstraps: Microcredit, Barefoot Banking and the Business Solution for Ending Poverty
(McGraw-Hill Business, 224 pages). Nothing else was available that made a good introduction for investors or anyone else who wanted an overview of this burgeoning financial sector.
Click here to see a video interview with Eric Thurman by TheStreet.com's Gregg Greenberg.)
Since demand is growing at an exponential rate among the millions of micro-entrepreneurs who are in great need of working capital loans, micro-bankers will need an estimated $10 billion to $20 billion in the next five years. It has become clear that neither the savings of micro-entrepreneurs, private donations, nor assistance from governments meets the demand for loans. No doubt the strong recent trend of MFIs becoming for-profit, regulated, scrutinized from an auditing standpoint and rated as full-scale financial institutions will accelerate.
Microfinance investment has an attractive risk/return profile. Microfinance debt offers a better return than monetary instruments. It offers an excellent alternative to fiduciary deposits or certificates of deposit. It offers lower volatility than typical emerging-market equities or bonds, as it is invested in instruments not yet quoted on stock exchanges. And the leading MFIs are highly solvent and have a low risk profile.
Which lending institutions and funds are investing in MFIs? Nearly 100 investment opportunities are listed at www.mixmarket.org. In addition, many MFIs are setting up investment funds of their own.
A Billion Bootstraps
contains an appendix of leading MFIs that would be a good place to begin exploring personal involvement in microfinance whether as a donor or an investor.
Here are quick profiles of a few MFIs that are attracting attention from the investment community.
On June 1, 2006, Compartamos was authorized by the Mexican government to operate as a bank, Banco Compartamos SA, Institución de Banca Múltiple. It sees itself as a social company with its role as one of generating development opportunities among the poorer population. Its credit quality has been rated by Standard & Poor's and by Fitch, and this has allowed Compartamos to enter the market by issuing bonds.
It made news earlier this year with its highly successful, oversubscribed IPO. Compartamos was the first microfinance company in the world to issue debt on the stock market with its own collateral and to become a financial intermediate between large investors and low- income groups.
Equity Bank, an MFI and bank based in Nairobi, Kenya, is a young and fast-growing MFI. Its mission is to "mobilize resources to maximize value and economically empower the microfinance clients and other stakeholders by offering customer-focused quality financial services and solutions."
SKS Microfinance (Swayam Krishi Sangam), based in Hyderabad, India, is one of the fastest-growing microfinance organizations in the world. Founded in 1998, it provided over $36 million in loans to close to 275,000 women clients in one of the poorest parts of India, the drought-prone Deccan region. In the last year alone, SKS Microfinance grew by nearly 300%, with a 99% on-time repayment rate.
Interestingly, Sequoia Capital, which backed enterprises such as Google and YouTube, bought $11.5 million worth of shares in SKS. Since its founding nine years ago, SKS has made loans at rates of 24% to 30% to 731,000 Indians.
Who would have known that microfinance would evolve from charity to become a form of investment?
Even Muhammad Yunus -- the 2006 Nobel Peace Prize winner -- could not have predicted this when he was moved to make a small loan of $27 to a group of 42 families so they could survive by selling items in the marketplace during the Bangladesh famine of 1974. Professor Yunus, in his foreword to
A Billion Bootstraps
, wrote: "I have always maintained that poverty was not created by the poor, but by society's institutions that became a 'disabling environment' for them."
That was mirrored, in different words, by the late Milton Friedman, who won the Nobel Memorial Prize in Economic Sciences in 1976: "The poor stay poor not because they are lazy, but because they have no access to capital."
Now that is changing.
Investors and lenders now see that new and solid profits are achievable, while at the same time helping those who seek a path to self-sufficiency and dignity through microfinance.
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Eric Thurman is the co-author with Phil Smith of "A Billion Bootstraps: Microcredit, Barefoot Banking And The Business Solution For Ending Poverty." Thurman was CEO of two major microfinance nongovernmental organizations -- HOPE International and Opportunity International -- and CEO of Geneva Global, a philanthropic advisory and grant facilitation service for wealthy donors.