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

A loan shark may charge, believe it or not, as much as 1 million per cent interest on a short-term loan, while an MFI is unlikely to push for more than 100 per cent; Compartamos typically charges 80 per cent over the full term of any loan. That may still sound usurious, but MFIs face high costs to service their portfolio of small and often rural loans — and you’re also unlikely to have your fingers broken if you’re late with a payment.

These relatively high interest rates can ensure healthy returns to investors, helping microfinance to gain traction in the mainstream investment community. According to the Consultative Group to Assist the Poor, or CGAP, fixed-income microfinance funds return on average 5.8 per cent per year to investors, while ProFund, the first microfinance private equity fund, returned 6.6 per cent a year in the ten years to 2005.

The idea of making money from the poor is anathema to some investors. But proponents of commercially viable MFIs, such as IFC, argue that attracting private capital to institutions run as businesses is the only way to expand the industry to reach the world’s unbanked population. ‘Profits do more to motivate investors than philanthropy,’ says Holtmann. ‘MFIs that can attract private capital, improve their services and deliver profits will be able to scale up to respond to demand. Even socially motivated investors demand profits because profitability is an indication of sustainability and it provides comfort that their money will achieve their development goals.’

The future of microfinance is likely to involve commercial banks and private sector investors, rather than just the development agencies and NGOs that currently dominate the industry. ‘We need slowly to extract ourselves from the market, and private sector money needs to replace us,’ says the head of a leading European NGO prominent in the industry. ‘Eventually, [commercial] banks will find that MFIs are the next frontier, perhaps the final frontier, in investing.’