Lending to America’s poor, we know, was neither profitable nor especially saintly. So why should lending to the poverty-stricken masses of Africa, India or Mexico be any different?
Microfinance, designed to provide funding to those unable to gain access to the traditional channels of finance, is a $25bn-$60bn business with more than 100m clients. Once the preserve of multilateral agencies and philanthropists, it is increasingly fertile ground for commercial operators, too. The latest effort to monetise microfinance comes from SKS Microfinance of India, which is floating next week. This follows Finca International’s collateralised debt obligation and Banco de Crédito del Perú’s $74m acquisition of Peru’s second-largest micro-lender, both last November. Even Bangladeshi Grameen Bank, the granddaddy of microfinanciers (if you discount those Franciscan brothers of mercy, aka pawnbrokers, in 16th century Italy) has a profit-making structure.
As this suggests, little loans – often with usurious interest rates – can generate big returns. According to data provider Microfinance Information Exchange, the median return on equity in 2008 (the latest available data) was 9 per cent; streets ahead of more conventional lenders. Peer group pressure and borrowers’ reluctance to shut their sole funding window keeps write-offs at an enviably low 2 per cent or so; even when Indonesia went into meltdown in the late 1990s, microfinance repayments stayed the course. Yes, risks attach. Academic research finds that high interest rates only work to a point, after which delinquencies rise and profits shrivel. Even with galloping growth, absolute profit numbers are too tiny for most investors to bother with. It is costly business to administer: operating expenses are a third of gross loans. Still, would-be investors in SKS have a good chance of burnishing their wallets along with their halos. Compartamos, the Mexican micro-lender which listed in 2007, has since virtually doubled pre-tax profits and its share price is close to the 2007 peak. Few banks can say the same.
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