Big Banks Move Into Microfinance-For-Profit

By Gregory S. Davis | July 27, 2008 AAA

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.

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