Citigroup brings microfinance to the U.S.

Microfinancing has swept into a good portion of the developing world--to much fanfare and hope. The idea that tiny loans can make a huge difference has really taken on a life of its own. Muhammad Yunus's Nobel prize seemed only to confirm that as an idea, microfinance has triumphed. Of course, the rush to provide these loans is even more concrete evidence.  

The idea is so good that now for-profit companies want in on the act--and that has generated a lot of controversy that has been rekindled just a bit by Citigroup. Typically, people associate microfinancing with the developing world, but there are those who think that loans of between $5,000 and $10,000 could make a big difference right here in the U.S. Citigroup has just announced a venture that calls for it to provide $30 million targeted to small businesses via an alliance with Accion, a Texas-based charity. Accion will originate the loans, but Citi and Accion will share the revenues and risks of the loans.  

The Financial Times reports that this may be the "first for-profit microfinance venture in the U.S." So this seems like it will provide a layer of small business financing somewhere below the typical SBA-type loan. And the U.S. may be the perfect place for a for-profit microfinancing program. But none other than Yunus is wary of private companies moving into the market to make a buck. The debate rages, but private players will certainly expand the market. Deutsche Bank says the volume of microfinance loans hit $25 billion in 2007, up from $4 billion in 2001, with another $250 billion still needed. The bank expects that private investors, drawn by the sector's social mission, stable returns, low default rates, and potential as a diversification play, will be pouring $20 billion into micro-finance institutions in 2015--10 times more than they did in 2006.  

The institutionalization of this market is underway. Two microfinance powers trade publicly: Mexico's Banco Compartamos, S.A., and Kenya's rapidly-expanding Equity Bank Ltd., which on Thursday reported 197 percent profit growth for the first half of the year, notes CNNmoney.com. There's also lot of talk of securitization and the like. Clearly, the train has left the station. There is no going back. For better or worse. - Jim