Microfinance ventures in emerging economies

Microfinance ventures in emerging economies: Revenues versus social responsibility


Introduction
Microfinance is banking the unbankables, bringing credit, savings and other essential financial services within the reach of.millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without. Microfinance is not simply banking; it is a development tool. It has been estimated that there are 500 million economically active poor people in the world operating micro-enterprises and small businesses.

Background
While micro-lending dates back hundreds of years, perhaps thousands, modern microfinance can trace its roots to nearly simultaneous initiatives in Bangladesh and Bolivia in the mid-1970s. The Grameen Bank in Bangladesh has had enormous success over the years in taking its peer-group-based model to rural clients throughout Bangladesh, and has exported that model to several other countries, where it has been repeatedly copied and modified by other Microfinance Institutions (MFIs).
Commercial microfinance, on the other hand, is relatively new. It wasn’t until the early 1990s that a confluence of supply and demand factors drove the provision of some micro-lending into a profit-focused model with a double bottom line – a return to investors and a socially responsible agenda. On the demand side, many MFIs had finally reached a level of efficiency where subsidized loans were not only no longer necessary, but in some cases were a disincentive to the efficient management of commercial microfinance and an obstruction to the social goals of economic development and self-sustainability. Meanwhile, the size of the microfinance industry worldwide had hit a point where subsidized funds from government agencies and multilateral institutions like the World Bank were no longer sufficient to cover demand. Global political and economic changes contributed to the growth in demand, as rapid democratization in Eastern Europe and the former Soviet Republics, along with capitalist reforms sweeping many Latin American and African countries, left hundreds of thousands of rural peasants suddenly dependent on no one but themselves.
Many of them flooded cities, where they couldn’t find work, or became refugees. Around the same time that demand was escalating, the supply side of microfinance was undergoing its own renaissance. The 1980s saw the rise of a Nouveau Riche class of philanthropists, many of whom had made their money in the computing revolution and were now looking for outlets for their charitable donations. Perhaps tired of having library wings named after them, they began to look overseas. Meanwhile, there was a surge in the amount of private sector funds looking for alternative investments. Emerging market investing hit its heyday in the early 1990s. Around the same time, socially responsible investors such as Amy Domini and mutual fund groups such as Calvert and Pax raised the level of awareness of socially responsible investing, and began to show investors that it isn’t all about charity – that investors can help make the world better while still earning a return on their investment. And if the Nouveau Riche of the PC Generation planted the seeds, the overnight wealthy of the Internet Generation grew the garden, raising awareness of labor and human rights issues beyond their home country borders.That brings us to the 2000s, when the dot-com bust and the ensuing economic and stock market downturns in the U.S. and other developed countries sent some investors out of the stock market in search of new, alternative places to put their money.

Commercial Aspects
Microfinance is undoubtedly one of the most diverse sectors of global finance, so it comes as no surprise that there is no single model that covers the institutions that manage commercial microfinance.
Microfinance investors are a mixed breed – they span continents and classes, genders and races, and they are as varied as the investment management institutions they put their money in. Those institutions range from banks and funds to offshore and onshore investment companies and a hodgepodge of other creatively organized and alternatively financed institutions. The microfinance institutions (MFIs) that dole out the loans and other financial products are an assortment of credit unions, cooperatives, NGOs, commercial and private banks, government agencies and a myriad of derivatives of these institutions – every bit as varied as the rural peasants, urban mothers, roadside traders, Arctic fishermen and Slavic seamstresses who borrow their money.
Collectively, however, all of these players have managed to prove that microfinance works. It achieves social agendas such as poverty reduction and economic development, and it can be – when managed properly – profitable. For investors, microfinance is a new and exciting asset class that is already a growing part of the portfolios of some institutional and individual investors the world over.
Before microfinance was commercialized, the process of micro-lending usually began with a grant or a subsidized loan from a government agency or from a multilateral institution. These funds would be made available to any number of different types of MFIs, which in turn would either lend them directly to individuals or distribute them to smaller, village-level MFIs which would in turn make the loans available to individuals. It’s important to note that in almost all such cases, the goal of the original funding source was not to earn a profit but to stimulate economic development and help eradicate poverty.
In commercial microfinance, the process begins on the supply side with an investment
into any number of microfinance -oriented funds, investment companies, cooperatives or
partnerships. The investment might be a securitized or non-securitized share in a fund, an
equity share in a company or partnership, or a share in a cooperative. Microfinance might be the entire focus of the fund, a majority focus, or just a small percentage of the fund’s assets. In many cases, commercial microfinance funds will take a combination of public and private funds, including subsidized loans from multilateral institutions or commercial microfinance loans that are guaranteed by quasi-government agencies – such as the U.S. Overseas Private Investment Corp. (OPIC).
While a few commercial microfinance institutions deal directly with clients in foreign
countries, most invest in carefully selected, profit-driven MFIs, which in turn distribute the loans to individuals and small businesses. The average loan for microfinance as a whole tends to be under $600, while loans from commercial microfinance institutions are on average slightly higher, in the range of $900, although some can go as high as $30,000 or as low as $100.

Private Investors
Investors in commercial microfinance include a who’s who of major philanthropic foundations such as the Ford Foundation and Canada’s Agridius Foundation, as well as individuals, corporations, endowment funds, socially responsible mutual funds, many of the world’s largest commercial banks, and more. Still, the amount of money invested in microfinance by private sources is miniscule compared with other alternative asset classes or other types of Micro-Capital Institute.