How to Invest in the World's Entrepreneurs

How to Invest in Global Microfinance

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Many people are familiar with the concepts of microfinance due to the popularity of website like Kiva.org, which lets anyone in the U.S. lend money to low-income and underserved entrepreneurs in over 70 countries. Since getting its start in 2005, the organization has funded more than a million loans totaling more than a half billion dollars with an impressive 99% repayment rate.

While Kiva.org has managed to attract a large amount of capital, the organization doesn’t pay lenders any interest, which makes for a poor investment decision.

International investors looking to add microfinance loans to their portfolios for both altruistic and profit motivations may instead of want to consider microfinance bonds that pay a defined coupon and interest rate over time.

In this article, we’ll take a look at some microfinance institutions that issue bonds, how investors can purchase them, and some other important considerations.

Investing in Microfinance Bonds

The easiest way to invest in microfinance bonds on a for-profit basis was through an organization called MicroPlace.com. Originally started with the help of PayPal, the company ended up shutting down on January 14, 2014 due to their inability to scale among smaller investors. The good news is that there are still many different ways for international investors to gain exposure.

The five most popular issuers include:

  • Calvert Foundation – The Calvert Foundation has invested more than $567 million in 380 CDFIs and non-profits worldwide over the past 18 years. International investors can visit the organization’s website to find a list of SIC codes to invest in bonds directly through any broker.
  • Shared Interest – Shared Interest has attracted upwards of $12 million in investments from more than 400 individuals and institutions without any lender losing interest or principal. International investors can visit the organization’s website to invest a minimum of $3,000 to serve as a guarantor of a loan made to these microenterprises.
  • WCCN – Working Capital for Community Needs (“WCCN”) has invested over $100 million into microenterprises throughout Latin America since 1991. International investors can visit the organization’s website to invest in microfinance bonds and fund these microenterprises.

Investing in Microfinance Equities

The microfinance revolution has moved beyond altruism and into profiteering for many large international companies. For example, SKS Microfinance Ltd. (NSE: SKSMICRO) is a $55.8 billion company that’s primarily focused on lending to women in rural areas of India, while Banco Compartamos SA (OTC: BMOSF) provides similar loans in rural areas of Mexico.

While investors in these companies are more focused on profits than purely altruism, the companies are doing good around the world by increasing the accessibility of capital to poor and rural areas. The success of microfinance programs around the world is difficult to deny given the high repayment rates and strong re-application rates for additional growth capital.

Risks & Other Considerations

Microfinance bonds may seem relatively risk-free, since the default rates are extraordinarily low in most cases, but investors should remember that all investments involve a degree of risk.

In this case, natural disasters and economic troubles in relevant areas of the world can have a negative impact on repayment rates, which can cascade in some cases if they are severe enough.

Of course, investing in microfinance equities is much riskier, since investors are assuming the risk of the organization itself. Some of these companies may have used leverage in order to improve financial returns, which introduces an added level of risk associated with the margin. If their portfolios suffer even a modest decline, the added financial risk could cause wider problems for the institution.

Key Takeaway Points

  • Microfinance bonds provide a great way to diversify a portfolio internationally, while helping entrepreneurs succeed.
  • Microfinance equities also provide exposure to the industry, but the motives for the investments are less altruistic in nature.
  • Investors should be aware of the risks associated with these investments, including the risks associated with leverage.