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. Investing

    How to Take Maternity Leave as a Freelancer

    Freelancers are not covered under the Family and Medical Leave Act, but maternity leave is still doable with these tips.
  2. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  3. Retirement

    5 Reasons to Start a Business After You Retire

    It can be beneficial in any number of ways: mentally, occupationally and even financially.
  4. Entrepreneurship

    The Top 5 Women-Owned Businesses in Denver

    Take a look at some of the most successful women-led companies in the Denver metro area, and learn why Denver is a great place for female entrepreneurs.
  5. Entrepreneurship

    4 Things to Know About Your Company To Make a Successful Pitch to Investors

    Learn how to make a successful pitch to investors. Regardless of your industry, size or market, there are some questions all investors need to have answered.
  6. Entrepreneurship

    Top 4 Billionaires Living in Los Angeles

    Learn how these multibillionaires built their fortunes to stand out from the crowd of the countless ultra-rich who call Los Angeles home.
  7. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  8. Investing Basics

    3 Business Tips from Restaurant Reality Shows

    The reality TV shows "Restaurant Impossible" and "Kitchen Disasters" offer lessons not just for restaurateurs, but for all business owners.
  9. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  10. Entrepreneurship

    4 Most Successful Indiegogo Campaigns

    Learn about some of the most successful crowdfunding campaigns on Indiegogo, which raised millions of dollars for everything from electric bikes to beehives.
  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