Ethan Arpi

The Birth of the Microfinance Fund

financeNext year microfinance celebrates its 30th birthday (Of course, that depends on who you ask). Beginning when Dr. Muhammad Yunus, an American trained economist from Bangladesh, experimented by lending money to 42 women so that they could buy bamboo for making and selling stools, microfinance has transformed throughout the decades, becoming a global industry and a pillar of international development. According to the Microcredit Summit Campaign, a whopping 92 million people have received microloans, a number that has attracted significant attention from more than just the do-gooders involved in international development. So it should have come as no surprise when The Wall Street Journal reported earlier this year that a new player has entered the arena of microfinance: the microfinance fund. Funding for microfinance has traditionally come from charities and government-aid organizations, the Journal notes. ?Now, an increasing number of private funds are steering capital to microfinance — and demanding a return, albeit a modest one in single digits, on their investments. By doing so, the funds hope to boost microfinance’s reach and efficiency, while also drawing more capital from investors.?

One of these funds is Bethesda, Maryland-based MicroVest, which provides capital to microfinance institutions that operate in the field. MicroVest invests in both debt and equity. According to the Journal, ?Debt funds expect annual returns to investors of anywhere from 1 percent to 5 percent, while equity funds, which usually have more risk and longer investment terms, expect annualized net returns of about 5 percent to 10 percent.? Other funds that have sprung up include the Dignity Fund in Oakland, Global Partnerships’ Microfinance Fund in Seattle, and Accion International’s Accion Investments in Microfinance.Generally speaking, these funds are for high-end investors who can fork over $100,000. However, there are a few exceptions and some funds will accept a minimum of a $1,000 investment.

Robert Pattillo, who started his own microfinance investment fund, argues that these new funds will make the industry more accountable and sustainable. “If you just donate it,? he told the Journal, ?You write that check one time and it’s gone.” By contrast, he sees microfinance funds as stakeholders that provide an extra check, ensuring that capital is managed properly and effectively.
But above all, the microfinance funds are another indication that the industry has gone mainstream.

From Dr. Yunus experiment in poverty-stricken Bangladesh to MicroVest’s fund in suburban Bethesda, it is safe to say that microfinance has come a long way in the last thirty years.