Microfinance has become a buzzword of the decade, raising the provocative notion that even philanthropy aimed at alleviating poverty can be profitable to institutional and individual investors. Instead of merely writing a check (then writing it off), why not make a tidy profit from a short-term, high-interest loan, most for under $200, so that a Mexican seamstress may buy a new sewing machine? Or so a Moroccan farmer can buy chickens so he may sell more eggs? Billionaires, global leaders and Nobel Prize recipients are hailing these direct loans to uncollateralized would-be entrepreneurs as a way to lift them out of poverty while creating self-sustaining businesses.
That promise has had a magnetic effect on private capital sources. Microfinance funding from private investors more than tripled to $2 billion in 2006. The field has attracted sterling banks and fund managers, including Citigroup. blue-chip venture capitalists like Sequoia Capital, tycoons like eBay founder Pierre Omidyar and Oscar-winning screen stars such as Robert Duvall–they’ve all joined the chase for returns in microfinance. Today, there are upward of 12,000 microfinance institutions issuing loans.
To help investors parse them, Forbes compiled its first-ever list of the Top Microfinance Institutions. We scoured 2006 data from the Microfinance Information Exchange, as well as analysis from ratings firms Micro-Credit Ratings International Limited and MicroRate, to rank the top 50 microfinance institutions (from a field of 641 reporting microfinance providers) by examining six key variables: gross loan portfolio, operating expense, operating expenses divided by the average number of active borrowers as a percentage of gross national income per capita, the outstanding balance of loans overdue by more than 30 days as a percent of
gross loan portfolio, return on assets and return on equity. Each microfinance institution earned scores in four equally weighted categories–scale, efficiency, portfolio risk and profitability. Rankings were then based on the combined average score of those four categories.
To earn a spot on our ranking, the institution must have had audited financial statements for 2006 or submitted these for 2005, with the intention of providing audited 2006 results when available. Note that our rankings attempt to measure financial performance, not the social benefits of any microfinance institution.
Even the least credit-worthy Americans might gasp at the high rates of interest to which recipients of microfinance loans are subjected–as much as 85% isn’t unusual. But veteran microfinance experts are quick to remind scoffers about the typical alternatives–a village moneylender who might charge interest rates three or more times as high.
As is the case for any “hot” investment vehicle, investors should exercise prudence when jumping into the arena. Fly-by-nights aren’t uncommon in this new market. Supporting the wrong microfinance outfit may fail to reduce poverty or produce financial returns. Check out the essay by Morgan Stanley executive Ian Callaghan on the perils of hunting for microfinance investments.
Our microfinance package also includes fresh commentary from Elizabeth Littlefield, a senior World Bank official, who discusses public vs. private funds flowing to this trendy niche. Michael Chu, a veteran private-equity investor in microfinance and Harvard Business School professor, argues why lending to the poor shouldn’t involve self-sacrifice. And legendary actor Robert Duvall and his wife Luciana Pedraza give an exclusive interview to the Forbes Video Network on their work on behalf of microfinance in Latin America.
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