Funding a path out of poverty

Elliot Wilson

15 March 2008

Elliot Wilson explores how investors can back ventures that lend to the world’s poorest entrepreneurs

Prathminda Kaur is the modern version of the Little Match Girl, only with a twist: instead of perishing in a Victorian winter, she’s making a nice living for herself selling red onions and bell peppers in a Mumbai market. Kaur arrived in the Indian coastal city eight years ago. To start with she slept on the street, borrowing money from a loan shark at dawn, handing him more than 90 per cent of her profits at dusk. On an average day, the interest on her loans worked out to an annual rate of 10,000 per cent. But two years ago a friend introduced her to SKS Microfinance, an Indian lender that makes millions of tiny loans to local entrepreneurs like Kaur. She borrowed £100 which she paid back in full (with £75 interest) over the course of the year. A year ago she borrowed £250 from SKS: she has since expanded her stall, and now sells vegetables directly to a couple of local restaurants. Her long-term aim is to buy a small flat for herself in the distant suburb of Navi Mumbai.

Microfinance institutions (MFIs) such as SKS are slowly but inexorably weaving themselves into the complex fabric of global wealth and capital markets. An estimated 3,000 MFIs operate around the world, providing up to 120 million mostly poor customers like Kaur with tiny loans, ranging from £50 to £750.

At its most basic level, microfinance — a concept developed and made famous by Nobel laureate Muhammad Yunus, creator of the Grameen Bank in Bangladesh — is founded on a simple but compelling investment principle: that around a billion and a half people are potential entrepreneurs who have little or no access to capital. For decades, the traditional banking sector has overlooked microfinance, due to the assumed high risk of dealing with borrowers with no assets, and the cost of managing millions of tiny loans.

Yet that attitude is changing and commercial banks and investors are taking a closer look at microfinance. Martin Holtmann, co-head of microfinance at the Washington-based IFC, a multilateral institution with £400 million invested in the microfinance sector, says that within two to three years MFIs will have become an asset class in their own right, with insurance firms, wealth managers and pension funds seeking exposure to the sector in their portfolios. ‘There is more interest in microfinance than ever before,’ he says.

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