Micro loan investing

Micro loan investing

Invest in someone elses future

Micro loan investing put simply is investing in a fund that essentially lends to the poor or disadvantaged in order to help the launch and development of small enterprises, businesses and communities. The borrowers typically pay very high inbterest rates on the loans they receive, not because of hgh default rates but because the size of these loans is typically very samll and the associated administration costs tend to be very high.

According to businessweek.com default rates on microfinance loans are typically about 4% which is siignificantly lower than those seen in the US subprime market over the latter part of 2007 and early 2008! Infact these default rates are much much lower than the typical 50% of business start ups that deafult in the UK each year. Many sight the main reason for these low default rates as being the pride the borrowers take in repaying their loans and the gratitude they feel at being given a chance when faced with adversity.

The mode of micro loan investing has evolved over time. It is the natural next step to caharitable giving. Many people resist donating to charity as they feel handouts are not the best way to resolve many problems in the developing world. Instead the logical step is microfinance. Instead of handing out rice, it makes more sense to issue loans to farmers so they can buy irrigation equipment or new tools, allowing them a more sustainable future where they can make money in the future, repay their loan and hopefull expand their businesses and stimulate ttheir local economy. This is the underlying belief of micro loans.

How to invest in microfinance

Obviously for the average person in the developed world to offer a small loan to someone in Africa, Eastern Europe or Latin America may not be realistic. There are an increasing number of funds on the market that themselves invest funds in the micro finance market, usually centered on one georaphical location. Some funds allow small investments, maybe as little as $1,000, however many require larger initial investments, restricting themselves to have only high net worth individual investors.

What returns does micro credit deliver?

Well as with any investment the value can rise asnd fall. Howver typical returns are between 1-3% for debts and 7-9% for equity investments. Though these may no set the world on fire there is another huge factor that attracts most investors in these types of funds. As well as the prospects of making modest returns, most investors are drawn to micro finance by the prospect of helping the poor or disadvantaged and reap great satisfaction from this social responsibility aspect of these investment programs.