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Big banks find little loans a Nobel winner, too

The world of finance is realizing Muhammad Yunus's idea is more than mere charity – it is good business.

By , / October 16, 2006



NEW DELHI AND BOSTON

Chris Brookfield can fairly say that this year's Nobel Peace Prize winner changed his life.

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He is not one of the hundreds of well-wishers who thronged Muhammad Yunus's Bangladesh home this weekend to celebrate a bright moment for a troubled nation. Nor has he ever received one of Dr. Yunus's microloans – loans of as little as $30 that have helped raise millions from abject poverty.

Instead, Mr. Brookfield is a former venture capitalist from Redmond, Wash., who has given up the life of dotcoms and wireless start-ups to raise money for microloans. His Unitus Equity Fund has collected $10 million from investors in order to offer small loans to the poor from Mexico to India.

As the world recognizes Yunus for his contribution to global peace, the world of finance is increasingly realizing his idea is more than mere charity – it is good business.

It is a trend that gives Yunus pause, saying in an interview that he would "like to see microcredit remain a social enterprise." But mounting evidence suggests that microfinance is moving beyond its modest roots, and Western banks are now keen for a share of the action.

"It has caught the attention of serious investors like Citibank and [Dutch bank] ABN AMRO ... and even the capital markets," says Syed Aftab Ahmed, senior manager for global microfinance at the International Finance Corp. in Washington. "The quality of the loan portfolios of these microfinance institutions is very high."

Throughout the developing world, the concept of microfinancing has been enormously successful. Yunus pioneered the idea in 1976 when he lent $27 to a group of poor Bangladeshi craftsmen who lacked the collateral to receive a traditional loan. The scheme worked, and in 1983, Yunus founded Grameen Bank on the concept. It has since lent $5.1 billion to 5.3 million people. And the idea has spread. The global supply of microcredit exceeds $12 billion for 50 million borrowers, by some estimates.

A next step for microfinance is to achieve an even bigger scale by luring investors from places like Wall Street, London, and Frankfurt. To some extent, this is already occurring.

Some of the biggest banks in the US, Germany, and the Netherlands – Citigroup, Deutsche Bank, and ABN AMRO – have units focused on the smallest of loans. In most cases, these bankers – like other profit-seeking investors in the field – aren't hiring their own loan officers in South Africa or São Paulo. Rather, they provide financial support to grass-roots lenders, and expecting a profit in return.

They have good reason to expect a profit. Historically, few microloans default; Yunus says Grameen Bank has a 99 percent repayment rate. And while nonprofit or agency support is typically vital for ventures started with microloans, a good share of them have developed into self-sustaining businesses.

Though the banks' emerging microfinance operations aren't a major contributor to their bottom lines, the steps hint at the promise of more Western money reaching the world's poorest people.

Last month, for instance:

• TIAA-CREF, the leading provider of teacher pension plans, announced a $100 million global microfinance investment program.

• Citigroup and the Overseas Private Investment Corp. launched a $100 million program to help provide capital for hundreds of microfinance organizations.

• Brookfield's Unitus Fund, a private equity fund that invests in microfinance institutions (MFIs), placed a $1 million investment in Credex, an MFI in Mexico.

"I'm more excited about the return potential of microfinance than I am about local venture capital," says Brookfield. "It feels to me like a global growth business that has much more growth ahead of it."

As it grows, this field should see a variety of choices for investors, he says, from initial public offerings of stock in some of the more successful MFIs to insuring debts incurred by such schemes. "You will see all kinds of investment vehicles," he says. "All of the same layers that exist in the traditional ... capital markets."

Yet Yunus is wary of microfinance as a profit vehicle. "Maybe banks can make a profit from it. There's no harm in it," says Yunus from his home in Bangladesh. "But this is what loan sharks do."

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