Source: Dow Jones MarketWatch
Original article available here.
SANTA MONICA, Calif. (MarketWatch) — Last year’s Nobel Peace Prize went to Muhammad Yunus and the Grameen Bank he founded for pioneering micro-finance practices that assist the extremely poor in making their way out of poverty.
In the spate of press that followed, many learned how micro-finance tactics have almost no defaults, how people use the capital to set up businesses that slowly allow them to crawl their way into the capital markets and out of poverty.
In developing countries, micro finance brings hope where there is little. It breeds a foundation of entrepreneurs who may help future generations overcome strife. It is a way for lenders to get a steady return on capital and practice social responsibility at the same time.
Yet, only four percent of the demand for micro finance is being met, according to MicroCapital.org. There is a huge bottleneck of loans, despite great strides by financial institutions such as Calvert that have adopted micro-finance lending.
The problem meeting demand isn’t so much that institutions don’t care to enter the micro-finance industry. Indeed, even global financial giant Citigroup has gotten into micro-finance lending. It’s that the technology isn’t readily available to track and account for loans properly.
Micro finance means credit, savings or insurance on an extremely small scale, as the term suggests. The practice is used to provide financial services to poor people, and transactions are usually in amounts less than $100. The theory is that, over time, these people will accumulate more money that helps them grow businesses and live better, more healthy lives. The types of businesses usually funded by micro-credit operations are storefront shops or other local types of commerce.
Bringing technology to bear
Because of the community and local nature of operations, it is often difficult for large lenders to track and audit their micro-finance instruments.
The Grameen Foundation, however, has just launched a new partnership with IBM that promises to change all that. Developed on open-source software, the program is cheaper and easier to maintain and allows more users (hopefully) to operate more confidently in the industry. The Washington-based foundation is separate from Grameen Bank but shares its philosophy. Yunus is a member of the foundation’s board.
Only about half of the micro-finance institutions in the world have an automated information system, according to the Consultative Group to Assist the Poor, and of the remaining half many have expensive, custom-built technology systems, which are challenging to maintain.
“With the help of IBM’s muscle, micro finance can expand by shifting from pen-and-paper loan processing to world-class, state-of-the-art computer programming tailor-made for micro finance,” the foundation says.
Individuals can invest in micro-finance instruments through financial institutions and community-based organizations.
Calvert, for example, has a High Social Impact Investment program for investors. The program places people’s money in mutual funds that target up to three percent of the assets for community-based investments. These investments are then placed in Community Investment Notes offered by the Calvert Social Investment Foundation. About 30% of Calvert Foundation’s $100 million portfolio is lent out on flexible, affordable terms to micro-finance institutions at work in over 60 countries, including the Grameen Foundation in India.
Calvert says it has helped tens of thousands of small entrepreneurs in developing countries “to start and run small businesses, increase their savings, and improve the health and education of their families.”
Double paybacks
Micro-finance loans earn relatively competitive interest rate returns with strong repayment schedules. Envest, another financial institution that operates in the micro-finance industry, says it “offers the opportunity for individuals and institutions to earn a competitive interest rate while providing poverty-alleviating capital to those who do not have adequate access to credit.”
It offers interest rates to investors of between 5% and 7% depending on the investment periods, (one to five years or more, respectively).
Loan repayment for micro finance is over 97%, according to Envest. The potential for future loans motivates borrows who want to continue to support their families.
Micro finance, to me anyway, is smart investment in the credit markets, a lot smarter than the investment bets made on subprime mortgages anyway.
When people need the loans they take to live – survive — it puts borrowing and lending into a whole new context. It allows both creditor and debtor to embark on a path of responsibility, with great results possible for both.
Micro finance is where much more of our money should go. There is a wide-open market in need. And with new technologies, there is little excuse for more institutions, and us individuals, not to lend.
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