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January 24, 2019

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Microfinance Sources Funding With Impact Investors

In competitive capitalist markets, there are plenty of financial resources supplied for ambitious entrepreneurs and giant corporations. However, it is less so the case for smaller businesses, especially those which lack the basic access to banks and loans. Inability to gain access to financial resources leads to little growth which in turn deter them from further progressing in their business performance. Therefore, there is a need for direct provision to this group which the mainstream financial world has overlooked. Microfinance fulfils this need for direct provision through issuing affordable loans to low-income population and small businesses.

 

Muhammad Yunus, a Bangladeshi Nobel Peace Prize winner and social entrepreneur, helped propel the development of microfinance in the 1990s and later founded Grameen America, which provides affordable micro loans, in particular to women in poverty in America.  Having reached 98,000 women as of 2008, these loans, typically short term and small in sum, can be used to open small businesses and enable women to support families or gain financial independence. Loan recipients are also aided with financial literacy trainings.

 

 Source: Google Images

 

 

Traditionally, the foundation has relied on philanthropy and donation as sources of financing the pool of funds. However, with a forecasted rise in demand, there is a need to finance an additional 80 to 100 million dollars in the next 5 years to close the gap. Having seen little sustainable future with relying on the generosity of philanthropists for funding, Grameen America has been seeking alternative financing options. With a noticeable transition in funding method towards impact investing, Grameen America has embraced the new medium of financing which can better align the goals of fund providers, which are the micro finance institutions, and the loan recipients. On one hand, the success of 99% repayment rate, coupled with decent interest rates encourages both social investors who wish to invest for stable and low-risk returns and existing patrons to do ‘good' and ‘well’ at the same time. On the other hand, with a more sustainable and secure funding source, loan recipients now can be granted larger loans if they are growing organically.

 

For investors in Grameen America, attractive returns are expected with a stable 3% annual interest rate less 5000 dollars for tax expenses, and investment risks further reduced by a 20% first-loss guarantee. Indeed, micro finance is gaining popularity among impact investors, having become the third largest sector. With a median investment of 1 million dollars among the first round of funding from investors including hedge fund firms and expecting ‘bigger offerings’ in the near future, the foundation is optimistic about the future of micro finance with impact investing.


Source:

Grameen America Gets Into Impact Investing Game: https://www.barrons.com/articles/grameen-america-gets-into-impact-investing-game-1517327509

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