Microfinance offers small loans to entrepreneurs in developing nations, with potential for double returns. It is a socially responsible investment that helps alleviate poverty and create business opportunities. Demand for microfinance loans is strong, and investors must select a microfinance institution to invest in. Women have a higher loan success rate in impoverished areas.
Microfinance is the practice of extending very small loans to entrepreneurs in the poorest sections of developing nations. An investment in microfinance has the potential to generate returns that are double for investors. Microfinance is the largest financial movement to alleviate global poverty and create business opportunities in poor areas, making it a socially responsible investment. Additionally, by investing capital in funds that issue microfinance loans, investors have historically realized rewarding financial returns relative to risk exposure. Although large sums of money have already been poured into this fledgling segment of the economy, the full potential for investment in microfinance may not yet have been realized.
Demand for microfinance loans is strong. Starting in 2007, there was a funding gap, a disconnect between the amount of money requested and the value of available loans, of $250 billion US dollars (USD). However, the amount of money dedicated to microfinance by institutional and small investors has continued to grow throughout the United States and in Europe.
To make a microfinance investment, investors must select a microfinance institution (MFI), which is a business that lends to those in the impoverished world. This MFI extends loans to individuals who are deemed worth the credit risk and who are more likely to generate profit by using those funds wisely. The MFI charges a reasonable interest rate for the loan, and investors share in the profits from those interest payments. If it weren’t for these MFI loans, the working poor would be forced to borrow money from loan sharks who could charge up to 1,000 percent annual interest on a small loan.
Regions where a microfinance investment could be allocated are some of the world’s poorest areas, from East Asia and Eastern Europe to sub-Saharan Africa. Loans are made to the working class in the currency belonging to the borrower’s nation. These investments, also known as microloans, can range in amount from less than $100 USD to more than $1,500 USD.
Although any investment in microfinance is at risk of borrower default, there is a higher loan success rate for women than for men in impoverished areas. Women tend to take a more conservative approach to trading, which lowers the failure rate. In addition, because many women entrepreneurs also raise families, many operate businesses from their own home, which eliminates the element and risk of travel and makes it easier for lenders to locate them for microfinance investment-related matters.
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