Microlending Offers Opportunity for Financial Start-ups

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Dec. 14, 2004--As microfinance continues to emerge as a means of alleviating poverty in developing countries, it has also become an attractive market for U.S.-based financial start-ups.

Microfinance, also known as microlending or microcredit, generally refers to small loans -- as low as a few hundred dollars -- made to people in developing countries to help them start businesses or otherwise aid their efforts to overcome poverty. While the use of microloans has increased in popularity abroad, it has not achieved a similar foothold in the U.S., where poor people have easier access to credit.

A recent report by the Grameen Foundation USA, a U.S.-based not-for-profit organization, described the current state of the microfinance industry as a fragmented marketplace of approximately 10 thousand microfinance institutions, or MFIs. It cited statistics that show the poverty level of an MFI's customers does not necessarily influence the profitability of its loans. Successful microlenders have found the business to be profitable when they can put together large, well-managed portfolios of such loans, helping to keep default rates low.

The report offered basic advice to smaller MFI companies that seek to access financial markets, including hiring an experienced chief financial officer, as well as an advisor from the investment banking world, and preparing a detailed business plan to communicate with potential investors.

The report warned, however, that the industry could be headed toward increased consolidation over the next several years, as small- and medium-sized institutions mature and larger banks "downscale" to tap into the microfinance market.