MICROCAPITAL.ORG STORY: Wall Street Journal Reports That While Microfinance Funds Have Previously Paid Off Some Investors Are Concerned About Future Prospects of Microfinance Industry In The Current Economic Downturn

A recent report in the Wall Street Journal [1] entitled ‘For Global Investors, Microfinance Funds Pay Off…So Far’ [2] by Mr Rob Copeland suggests that whilst investments in microfinance funds have proven to be lucrative in the past 12 months, investors are concerned about future prospects in the microfinance sector as a result of the weakened global economy. According to research undertaken by CGAP [3], the USD 30 billion microfinance industry has been expanding its lending at a rate of 40 to 50 percent over the past 5 years. Mr Copeland states that certain microfinance funds have returned 4.47 percent for investors over the past 12 months, according to a benchmark index. Details of the said index were not given. He contrasted these figures with a 22 percent loss as registered by Standard & Poor’s 500-stock index [4], one of the commonly used benchmarks to assess the overall performance of the US stock market.

Some participants have voiced concerns that ‘too much money is chasing too few loans’ although not everyone is convinced the microfinance industry is hitting a barrier. Others argue that the microfinance business is still in its infancy and consider a market size of USD 30 billion a ‘drop in the bucket’ compared with the actual needs of microfinance clients worldwide. Mr Jacques Grivel of the Luxembourg-based USD 100 million microfinance fund Finethic [5] was quoted as stating that ‘as soon as we reach a certain limit, we will see more [loan] defaults’. Mr Bob Annibale, head of a unit at Citigroup [6] that advises local microfinance lenders, said his clients are ‘aware of what’s happening in their markets and the challenges’. He added that they have halved their lending pace and are taking a harder look at potential borrowers.

In spite of some opposing views, fund managers, spurred by the surge in investor interest, are said to be launching new funds. Dexia Bank’s [7] USD 500 million Micro-Credit Fund [8] has added USD 100 million in the past year and MicroVest Capital Management [9], a Bethesda, Md.-based company, is said to be starting a new fund later this year. MicroVest’s first fund is said to have generated an average of 8 percent in annual returns since 2003, according to a fund manager at Microvest.

Mr Copeland reports that challenges remain for investors who are keen to participate in the microfinance industry. He states that microfinance is a largely unregulated sector and lending standards remain relatively opaque. Since most U.S.-based funds aren’t registered investment companies, they are not subject to regulation or supervision by the Securities and Exchange Commission [10]. Reliable data about loan performance at MFIs is difficult to obtain. Mr Copeland points out that according to CGAP, the accepted default rate is around 2 percent. The International Association of Microfinance Investors [11] attempted to verify the 2 percent default rate earlier but took the view that the rate could already be much higher as book-keeping by many local lenders tend to be incomplete. In constrast, Mr Copeland states that the current U.S. subprime-mortgage default rate is closer to 30 percent for loans that are 90 days past due or in foreclosure.

Mr Copeland managed to interview Mr Gustavo Moron, a business manager for Financiera Edyficar [12], a small Peruvian bank that specializes in lending to small-business owners. According to Mr Moron, his business is facing stiff competition in a fledgling economy. In cities like Cusco, at the foot of the Andes Mountains, Mr. Moron is reducing monthly interest rates to 1 percent from 3 percent to salvage repayments from taxi drivers, artisans and tour guides who are not making money because of a fall in international tourism. In a climate of shrinking returns, he was quoted as stating in a telephone interview from Lima that ‘we’re loaning to people we wouldn’t have two years ago’.

By Chinq Yee Chong, Research Assistant

Bibliography

[1] The Wall Street Journal: http://online.wsj.com/

[2] WSJ report entitled ”For Global Investors, Microfinance Funds Pay Off…So Far’: http://online.wsj.com/article/SB125002519860023799.html

[3] CGAP: www.cgap.org/

[4] Standard & Poor’s 500-stock index: http://www2.standardandpoors.com/portal/site/sp/en/us/page.category/indices/2,3,1,0,0,0,0,0,0,0,0,0,0,0,0,0.html

[5] Finethci fund: http://www.finethic.org/fr/home

[6] Citigroup Microfinance: http://www.citi.com/citi/microfinance/

[7] Dexia Bank: www.dexia.com/

[8] Dexia Micro Credit Fund: www.dexia.com/e/discover/sustainable_funds2.php

[9] MicroVest Capital Fund: www.microvestfund.com/

[10] The Securities and Exchange Commission: www.sec.gov/