More on The Economist's Microfinance survey

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The Economist was on fire last week! Not only did they like my book, but the aforementioned survey on Microfinance is thoughtful stuff. One of the important issues they raised was the entry of credit rating agencies into the business. This is important because information is.

Then the old question of whether the industry makes money, or should be subsidised in some way. As always, The Economist does a good line in scepticism...

Industry-wide data are in short supply, and those that are available suffer from what statisticians call “survivorship bias”: institutions with terrible repayment records go bust, taking their bad numbers with them and leaving only the better records to be examined.

...but offers an interesting counterexample:

In 1995, a handful of social investors, headed by ACCION International, Calmeadow of Canada, Triodos of the Netherlands and Fundes of Switzerland, raised $23m to create Profund, a Latin American investment pool intended to demonstrate that investing in microfinance could be commercially viable. It was designed to run for ten years, and true to its mission it sold off its last investment this summer. By liquidating its portfolio and turning it into real cash, it became a yardstick for the investment performance of a microfinance institution.

At first sight, its returns look unexciting: just 6% annually, despite lots of risk. But on closer examination this was a remarkable performance. All of Profund's capital was contributed in dollars and then invested in local currency. In every country it operated in, its dollar returns were reduced by local currency depreciations, reflecting the economic chaos in much of Latin America during that decade. Two of the countries in which it had investments, Paraguay and Ecuador, suffered system-wide financial collapse. Haiti, Venezuela and Bolivia faced riots and revolutions. Good banking is, in the end, no match for bad government. Most investors in the region watched their money burn.

But there's more. Owen Barder discusses whether microfinance should be subsidised (he says no and he's probably right) while a note from our website, Do Pro SME Policies Work? is also sceptical.

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