Microfinance, once the providence of small regional lenders and NGOs, is now a growing trend for some of the world's largest and most powerful corporations. The small lenders, who began lending money to help poor people in underdeveloped countries to start or expand a business, have been joined by larger conglomerates like General Electric (NYSE:GE) and investment banks like CitiGroup (NYSE:C). Of course, this move has been met with skepticism. What does GE have to gain by financing a $100 loan to someone in Tanzania or Haiti?

It's important for investors to understand where small and large institutions are branching out into the world and then decide if microfinance fits into their asset allocation mix.

Demand for Microlending
Deutsbank Bank
(NYSE:DB) estimates the global demand for microlending to be $250 billion, while only a fraction of that amount is currently being met. Last month Citi Microfinance extended a $10 million credit facility to ASA, a leading microfinance lender based in Bangladesh. ASA is recognized as one of the world's leading microfinance lenders by offering favorably low rates of interest for borrowers and relatively high rates of return on assets for lenders.

GE Money in Frontier Markets
Earlier this month GE Money made a $1.5 million three-year commitment to help FINCA's Village Banking, one of the largest providers of basic financial services to the poor. The goal it to reach one million of the world's lowest income entrepreneurs by 2010. Early target regions for funding include the Middle East, Africa and Asia. The loans typically range from $50 to $100 in size and are repaid over the course of four months.

Barclays in Uganda
Barclays Bank
(NYSE:BCS), in cooperation with US NGO Care International, is funding the expansion of microfinance lenders in Katine, Uganda. The Katine Project, the formal name of the lending program, aims to improve income levels, graduate successful borrowers to commercial loan status and ultimately create new customers. With only 4% of Africans holding bank accounts, the opportunity for Barclays to grow along with the country and the continent is tremendous.

Conflicts of Interest
The intentions of institutions moving into microlending strictly for the sake of making a profit versus making a difference is being debated. Exorbitantly high interest rates on some loans draw red flags, while issuers of the high interest rate loans counter with a list of risks taken by the lenders to provide the loans often without the backing of any collateral from the borrowers.

It's a sad state of affairs when one hopes the big companies are getting into microfinance for publicity, but that may be preferable to darker, more exploitive motives. (For related reading, check out The Green Marketing Machine.)

Final Thoughts
On an individual level people are using nonprofits like Kiva to select entrepreneurs from around the world in order to loan money directly to them. Individual microlending does come with the risk of non-repayment. For investors who are giving for the sake of giving, the investment can be worth the risk when you consider the potential aid the money will provide. As larger institutions branch into non-traditional lending spaces, individual investors may choose to research their own microfinance opportunity suitable for their own microlending desires.

For more on alternative lending, check out our related article Peer-To-Peer Lending Opens Doors For Lenders/Borrowers.

Related Articles
  1. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  2. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  3. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  4. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  5. Professionals

    RIAs: Why Discounting Your Fees Is a Big Mistake

    For RIAs, lowering your set price is a short-term fix. Here are a few other ways to reach out and appeal to a wider array of potential clients.
  6. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  7. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  8. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  9. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  10. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!