Microfinance is the provision of financial services to economically active poor populations
By giving access to capital to people excluded from the formal banking sector and economical arena, one opens up an opportunity of virtuous cycles of financial security, savings and growth. Micro- and small entrepreneurs can work to stabilize their cash flows, create jobs and improve their living standards.
Microfinance replaces neither humanitarian aide nor charitable purpose donation for the world’s destitute population and post-conflict areas. It offers poverty alleviation opportunities to small entrepreneurs who aim at sustaining their own needs through various professional activities.
“Microcredit and microfinance have changed the lives of people and revitalized communities in the world’s poorest and also the richest countries. We have seen the enormous power that access to even modest financial services can bring to people. With access to a range of financial tools, families can invest according to their own priorities - school fees, health care, business, nutrition or housing. However, studies have shown that of the 4 billion people who live on less than $1400 a year, only a fraction have access to basic financial services. With this huge unmet demand, the Year of Microcredit 2005 calls upon us to build inclusive financial sectors and strengthen the powerful, but often untapped, entrepreneurial spirit existing in impoverished communities.” (United Nations)
Microfinance can also be seen as an investment opportunity, with a double bottom line. Microfinance institutions, offering credit and business advisory services to micro- and small enterprises, work to democratize the access to capital. They are both commercial profit-seeking institutions and mission driven entities aiming at poverty alleviation. By helping these institutions grow and sustain their micro- and small clients demand, investors achieve both a financial and a social impact down the value chain.
Microfinance can thus be seen as a large market, from the investor down to the micro-entrepreneur, with an opportunity for the investor to fill an important existing gap between a large unmet demand and a new emerging supply.
A “micro-entrepreneur” refers to an economically active poor running a micro or small business. Whether registered or informal, his self-sustained professional activities are the sole income generation for himself and his peers, family and dependants. Whether destitute, extremely poor or non-poor but highly vulnerable, his exclusion from mainstream financial services puts him into economics of emergency and survival, incapable of generating savings, accessing credit lines or investing in his future.
A “microfinance institution” (MFI) means an organization that provides financial services targeting a clientele that is poorer and more vulnerable than traditional bank clients and is attempting to impact its clientele through improvements in their financial situation and more generally through improvements in their living standards, welfare and social capital.
capital markets & socially responsible investors
The socially responsible investment (SRI) market is estimated at about 3 trillion dollars worldwide. The share of SRI funds allocated to emerging markets is estimated at about 1%. Ethical funds, sustainable investments and socially responsible ventures are growing rapidly into the deontology of fund managers and the awareness of investors.
Globalization and geopolitical events also are increasingly driving capital towards the periphery, opening up new opportunities from previously unattended populations. Emerging markets funds, often theme oriented (sustainable development, environment, water, renewable energy, housing, small enterprise, etc.) are becoming every day more apparent.
Whether socially responsible or not, today investors are increasingly looking into low volatility opportunities and/or segments of the market uncorrelated with mainstream global benchmarks. Absolute returns, capital guarantees and value for the money are becoming just as important as relative performance.