Global business The big trouble in small loans.As large banks pile into microfinance,will profits get ahead of people?

Rafael Llosa's company has been lending money to some of the poorest people in Peru for 30 years.It used to be a fairly lonely endeavor.Giving tiny loans to impoverished women to make ceramics to farmers to buy milk cows was hardly seen as a great business.


In 1998 the organization Llosa runs,now called Mibanco,converted from a nonprofit into a bank,demonstrating what other microfinance institutions around the world knew too,that the poor are good risks who repay loans on time,get enough of then together,you can not chip away at poverty but also turn a profit.


Today Lloas has a very differnet marketplace to contend with.Success at Mibanco has piqued the interest of the commercial banks,which historically have shunned the 45% of Peruvians below the poverty line.Now big banks are going after Mibanco's clinets with low-rate loans and-realizing it takes special know how to work with the unbanked-hiring away Mibanco's employees as well.They are very good competitions.


And he's getting more of them,from directions he never could have anticipated,Last year the Spanish multinational BBVA raised some $300 million to invest in microfinance,then reached across the Atlantic to snap up two Peruvian firms.Everyone want to do this now,and it's not only Peru.This change is everywhere.Everywhere microfinance is working,it's happening.


What's happening? To be blunt about it.The pinstripes are chasing the poor.Microfinance,once a relative cottage industry championed by antipoverty activists and development wonks,is on the verge of revolution,with billion dollars of from big banks,private-equity and pension funds pouring in,driving growth of 30% to 40% a year,Financiers are convinced that there's huge money to be made in microfinance.


That would seem to be a fantastic turn of events,tranforming microfinance institutions into more sophisticated operations that can reach millions more people.In the dusty village of Veeravelly,in the state of Andhra Pradesh,for example,loans from SKS Microfinance have led to a spate of small business and,in turn,money for onetime luxuries like refrigerators and solid roofs.A more competitve,more developed industry means lower loan rates and new services like saving account,mortgages and insurance.Clients are coming into our offices and saying.OK,if I go to another microfinance institution,I can get a longer term or a lower interest rate,one of the world's most competitve microlending markets.


But alarm bells are going off too.The emergence of players who are out purely for profit has raised the possibility that,far from nurturing the poor,microfinance schemes could end up milking them,especially in countries where lenders don't have to clearly disclose interest rates.When the Mexican microfinancier Banco Compartamos went public last year,revealing its loans carries rates of about 86% annual,the development consortium Consultative group to assist the Poor(GGAP) and others scorned it for having put shareholers ahead of clients.There is some risk that the mainstreaming of microfinanace will threaten the very essence of microfinance
s core mission,to help poor people lead better lives.At a time when governments,financial institution to the developing world,the microfinance revolution illustrates the benefits and costs of marrying profitmaking with poverty relief.



Thinks money-making and good works can be mutually beneficial.Akula runs SKS Microfinance,India's largest microfinancier,which is at the forefront of the new-money trend.Last year SKS sold an 11.5 million stake to the private-equity shop Sequoia Capital in a first-of-its-kind deal.Talk of a projected 23 % return of equity snapped many financiers to attention.



This year SKS plans to reach 4 million customers like those in the village of Veeravelly,who have been using loans for projects like buying buffalo and opening a welding shop.Unless we have capital markets interested in microfinance,there's no way we could get to that many borrowers.A deal in which Citigroup will buy 44 million in loans off SKS's books,for instance,is expected to help SKS reach 200,000 people across 7,000 villagers.Among the beneficiaries are women like Parajata,a window in Veeravelly who was working as a day laborer and barely earning enough to feed her children before a 50,000-rupee($1,200) loan let her open a grocery shop and start earning enough to periodically buy her kids new clothes.There has been a dramatic change in my life.