BRUSSELS, Belgium (WOMENSENEWS)--What was once the realm of donor dollars and tiny loans to extremely poor women in Bangladesh is developing into a multimillion dollar market for international investors.
In March, New York-based investment banking giant Morgan Stanley offered a $106 million bond on behalf of 65 microfinancing institutions, or MFIs, and the bond sold immediately. Banks, insurance companies and investment funds from the United States and Europe snapped it up. Dutch development bank, the Netherlands Development Finance Company (FMO), bought 30 percent.
The deal follows two other bonds worth a total of $57 million in 2004 that were offered only in a limited number of markets and currencies.
Morgan Stanley's deal breaks new ground by turning international investors in the United States and Europe into microfinance creditors who see new opportunities to profit by helping individuals start up businesses in developing nations.
In the past, most MFI credit originated with charitable Western donors. But if the bonds do well they may spur further offerings and signal the start of vast new capital flows in search of profits from millions of people living on less than $1 a day.
The MFIs in the Morgan Stanley bond deal will route the money to small borrowers, or microentrepreneurs, to use in a range of ways. Some may buy chicken coops for their backyard poultry farms. Others may order supplies to make handicrafts to sell to tourists.
This end-point borrower may pay interest rates that range between 15 percent and 35 percent on her loan of $100 or $500.
Investors in the bond, meanwhile, will be repaid at an annual interest rate of 6.17 percent; higher than a typical savings instrument of less than 5 percent.
Private Money Needed
"There isn't enough money from donors and development banks to fund MFIs so the rest has to come from the private world," said Jack Lowe, CEO of Geneva-based BlueOrchard Finance, a microfinancing group that persuaded Morgan Stanley to handle the offering. "There will be a funding gap and someone has to take up the banner so growth of MFIs is not slowed."
Lowe said MFIs will face a demand for between $10 billion and $20 billion over the next five years and Western donors who have provided most of the micro-credit to date can only provide around 5 percent of that amount.
As borrowers have established a strong record for paying back their loans--up to 98 percent, according to microfinancing pioneer Grameen Bank in Bangladesh--the supply and demand for microfinancing has steadily risen.
What began in the late 1970s with 42 craftswomen in Bangladesh that would one day become Grameen Bank and a fledgling nongovernmental organization in Brazil now reaches more than 92 million people in 85 countries, 66.6 million of whom are the poorest in the world, and 55.6 million of whom are women, according to the Washington-based Microcredit Summit Campaign.
Those borrowers today have outstanding debts of between $18.9 million and $30.5 million, according to Paris-based nongovernmental organization PlaNet Finance.
Two Years to Pay Off Average Loan
A borrower's average income increases 25 percent with the first loan, according to Opportunity International, a Christian microfinancing group based in Oak Brook, Ill. But if a woman makes $300 a year before her loan of $100, her average income for the year she receives her first loan will be $375, meaning it will take two years for her to pay off the loan and $35 in fees before she begins to see a profit.
Microcredit offers a slow route to profitability, but Elizabeth Littlefield, CEO of the Consultative Group to Assist the Poor, a Washington-based think tank housed in the World Bank, thinks it can help develop local capital markets that will eventually supplant the need for Western aid and Wall Street bonds.
"The ultimate end game of building sustainable financial markets that serve the poor is local market development, not about Wall Street or one-time transfers of money from the North to South," said Littlefield. "Local institutions need to develop capacity to safely and competently inter-mediate in local markets; take in savings on one hand, distribute loans on the other hand. When it can do that, it won't need investments from Wall Street anymore."
By this theory, micro-borrowers will gradually build savings deposits in local banks that will form a lending pool for other borrowers in the same community. A local banking economy will take root in a currently impoverished part of the world and what is known as "economic sustainability" will be achieved, reducing or eliminating dependence on foreign capital or aid.
Littlefield is optimistic that Wall Street-style bonds--which unlike donor grants must be repaid--will encourage MFIs to become more efficient and eventually be able to lower the interest rates charged to the end-point borrowers.
High Costs for MFI Loans
Lowe said his company has established lending histories with the 65 MFIs who receive payouts from the Morgan Stanley bond but BlueOrchard doesn't set policies for what levels of interest they can charge their own borrowers. Lowe said high interest rates are common to MFI loans because there's more administrative work that goes behind hundreds or thousands of small loans rather than one or two large ones.
"The distribution system for small loans is intensive and that's why rates are higher, but if someone gets out of line, we can reduce the loan or not loan to them again in the future," he said.
MFIs say the cost of processing a loan is the same whether it's for $100 or $1,000. If a loan entails hand delivering and hand depositing checks and sending an agent into a village checkpoint to pick up payments the average loan-processing cost can go as high as 35 percent per loan.
Microfinance institutions can also get hit by foreign-exchange losses when a foreign donation switches from one national currency to another. If the Colombian peso drops by 20 percent against the euro on the day a $126,600 donation from a Dutch donor is transferred to an MFI in Bogota, for instance, the donation could shrink by $25,000.
"I have been very concerned about the level of foreign exchange risk put on these MFIs by Northern fund managers who understand the risks but can't hedge them, and yet are imposing them without adequate disclosure on MFIs who often are not aware of the risk, and in any case can't hedge them either," said Littlefield.
The Morgan Stanley bond deal helps guard against some foreign-exchange rate losses by denominating about 30 percent of the $106 million--$31.8 million--in local currencies such as the Colombian peso, Russian ruble and Mexican peso, bypassing the risks of foreign exchange markets.
Meghan Sapp is European correspondent for Women's eNews. She is a freelance journalist based in Brussels, Belgium, and writes primarily on trade, development and agriculture issues.
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For more information:
The Microfinance Gateway:
Consultative Group to Assist the Poor: