Microfinance Banking: Act Local, Think ROI

Microfinance succinctly describes the oft-repeated phrase Act Local, Think Global, wherein small sums of money are loaned to individuals or cooperatives, planting the seed for families and communities to become more self-sustaining. Microfinancing is a simple story, but is gaining backing by investors seeking ROI in high-growth, under-served markets such as India.

We global consumers may not know or care when we buy a product that originates in a micro-financed venture, but it’s reassuring to know that there are small success stories unfolding around the globe, right now. And, in such countries where there are large untapped credit demand, the investors follow.

On the expectation that credit to the nation’s poorest may surge by more than 40 percent in a market — where about 120 million households don’t have access to banking and financial services — Bloomberg reports that India’s largest microfinance company SKS has attracted such investors as George Soros’s Quantum (M) Ltd. hedge fund.

I wonder at what point investors will shift added fees onto the backs of the borrowers, in order to reduce the risk? We see it happen in the world of insurance, wherein policy holders in high-risk settings pay a premium for the privilege of being covered. And, the other inevitability is regulations. Fast Company reports on the emergence of standards aimed at keeping all parties honest, though I suspect fees levied against borrowers will again result.

In a more philanthropic frame of mind, here’s a news release announcing top-performing micro-finance organization ACCION, based in Boston and nearing its 50th year in operation. ACCION’s mission is to give people the financial tools they need – micro-loans, business training and other financial services – to work their way out of poverty. This is what it’s all about.

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