Profitable microfinance and its spillovers

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What has very low default rates, relatively high administrative costs and high interest rates? The answer is: microfinance loans.

Despite the unfavorable expense ratios relative to commercial banks – the cost of lending one dollar is below four cents for a traditional bank compared with at least 10, and in some cases over 20 cents, for microlenders - microfinance institutions (MFIs) are beginning to attract serious money.

Though not without its critics, the recent success stories strengthened the credibility of microfinance as an "investment grade" asset class in commercial capital markets. Capital from a growing number of private equity, hedge funds and big banks, including ICICI, ABN Amro and Citibank, has been helping supplement limited funding from donors and foundations.

More investment has already expanded the industry. Maria Otero, the president of ACCION International – an investor and lender to MFIs said that "it took 20 years to win [the] first million clients, but only three years to obtain [a] second million."

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