It is estimated that in the developing countries there are more than 500 mn small businesses which create economic added value requiring very small loans, on the order of USD100 to USD1,000. The small size of such loans prevents those businesses from accessing the services of the local commercial banks. So micro-entrepreneurs can either resort to informal sources of finance (money-lenders, friends, relatives …) or turn to microfinance institutions (MFIs).
The basic idea behind microfinance is simple: to democratize access to capital and thus enable small businesses to access sources of finance that are stable and charge attractive rates of interest. This type of investment offers many advantages, including low credit risk, thanks to the excellent rate of repayment (97%-98%), intrinsically low volatility, no correlation with the major markets and a very strong social impact.
Convinced of both the financial soundness and the social usefulness of microlending, ethosfund recently invested a portion of the Fund’s cash in Dexia Microcredit Fund, a Swiss management company specializing in microfinance, managed by BlueOrchard Finance S.A. This fund now makes loans to several carefully selected MFIs, thus enabling them to offer credit at below the local rate. While these MFIs may have different operating methods, they do have in common the respect of certain principles such as working directly in the community, offering simple, fast loan procedures and having a network of entrepreneurs who are jointly liable for each other’s loans.
