Microcredit could be safer than a Treasury

| | Comments (0) | TrackBacks (0)

MarketWatch

Microcredit could be safer than a Treasury

By Thomas Kostigen

August 12, 2011

 

SANTA MONICA, Calif. (MarketWatch) - Buy debt instruments in companies in the developing world. Here's why: people need to repay their loans, quite literally, to survive.

 

As stock markets around the world are turned into trampolines, there is solid and stable ground on which to stand and make steady returns in the credit markets - the microcredit markets.

"I am getting between 4% and 6% on my money and I have several investments in emerging-market debt around the globe," one sophisticated investor told me yesterday. He claims to have millions of dollars invested in microloans.

 

Microloans are small loans extended most often to people in poverty who operate small businesses but who can't qualify for traditional banking. Shop owners, farmers, and the like are the typical borrowers. As their businesses are linked closely to their ability to earn an income and survive, their likelihood of repaying loans is often higher than larger businesses. Of course, there is risk of nonpayment. A less-risky way to invest in these is through a fund that has a portfolio of loans.

 

There are many funds serving the microcredit market offered by large brokerage firms such as Deutsche Bank as well as independent fund groups such as Root Capital.

 

Grameen Bank is considered the pioneer in the space. It was founded by Muhammad Yunus, who won the Nobel Peace Prize for his efforts founding the practice. He started the microlending business by personally lending money to entrepreneurs in Bangladesh in the mid-1970s. It grew from there and has spread around the world, along the way becoming more sophisticated. For example, there are pooled loan funds for farming cooperatives that mitigate commodities risk. And there are other debt instruments that convert to equity.

 

Mostly, however, microlending provides a simple yet critical service to the world's poor and gives them an opportunity to prosper.

 

There has been controversy of lenders charging too high an interest rate to borrowers and even, reportedly, prompting some to commit suicide due to their inability to repay their loans.

 

High-interest rate loans aren't the norm, though. In fact, the biggest investor complaint about the microcredit markets is usually that the returns are minimal.

 

Still, today's volatile equity markets present a unique opportunity for investors to profit and receive consistent returns. That in and of itself is - or should be - a major selling point.

 

Ebay has even joined the foray through its PayPal subsidiary. Microplace.com allows users to click on, find an investment they find attractive, open an account and invest. The account tracks the investment and garners interest payments. It's pretty cool. Kiva.org, offers something similar. And if you take a look, you'll find that thousands of people are making investments this way.

 

On the ground, it means that a borrower such as Peter Lang'at, who lives in Litein area of South Rift, Kenya, can get an $875 loan to buy a dairy cow, improve his farming prospects, start a transportation business, and feed his family. Or the Nzega Group in Tanzania can get $3,825 to buy more sacks of charcoal to increase sales so people in the area can cook and have an energy source.

 

Sure you can sit there and wonder if the United States will be in a position to repay its massive debt someday - and suffer the volatile stock market consequences. Or you can invest in a microcredit facility and wonder if someone on the brink of survival will repay their debt.

 

Which is a safer bet?

0 TrackBacks

Listed below are links to blogs that reference this entry: Microcredit could be safer than a Treasury.

TrackBack URL for this entry: http://blogs.cfed.org/cgi-sys/cgiwrap/cfed/managed-mt/mt-tb.cgi/3606

Leave a comment

About this Entry

This page contains a single entry by CFED published on August 12, 2011 3:35 PM.

Pelosi Appoints 3 on Her Team to Complete the Deficit-Reduction Committee was the previous entry in this blog.

The Hijacked Crisis is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.