Microfinance – Impact Investment in the Corona Crisis

Image by David Mark from Pixabay

What does that actually mean impact investment?

Impact investing refers to investments made in companies, organizations and funds in order to achieve measurable, beneficial social or environmental impacts while generating a financial return.

Investing in microfinance funds is one such impact investment. Even if the idea of ​​cooperative loans is very old and tried and tested. When Prof. Muhammad Yunus was awarded the Nobel Peace Prize in 2006, the granting of microcredits in emerging and developing countries received a whole new boost.

What is the effect of such a plant?

For many people, especially in emerging and developing countries, a microcredit is often a unique opportunity to break out of poverty. Investors can invest in the financing of microloans, for example through microfinance funds.

There are many reasons for poverty in many parts of the world. A key factor is that many places have no access to capital. Capital to invest in a small business. With little money, a seamstress could buy a sewing machine and fabrics and go into business for herself, a craftsman could buy tools and materials to open a workshop. But beyond the cities in emerging and developing countries there are usually no banks far and wide from which they can apply for loans.

But even if there was a means of transport to the next town: No bank would grant such a person a loan who cannot offer any collateral, who does not even have the few hundred euros to open a small business. This is also the dilemma of many city dwellers who have no prospect of a microloan. In addition, business with such small loans is not worthwhile for conventional banks. The result is that in such poor countries many people have a business idea in order to build an existence, but no one gives them the capital to implement such an idea.

See also  Marginalization - What is it, definition and concept

Microfinance Institutions (MFIs) can help overcome this dilemma. Because they give small loans to people who cannot offer the usual collateral. And they do not shy away from the effort that this special lending business entails. Loan officers can only operate it to a limited extent from the branch and often have to collect the interest and repayments in person from customers, who also give small businesses comprehensive advice. There are also provisions for potential credit losses and refinancing costs. This is also one of the reasons why the interest rate for a microloan is much higher than for lending in industrialized nations. There are also other aspects, such as the usually very high inflation. As a rule, an MFI customer first receives a small microcredit. If he succeeds in repaying the loan as agreed after the term, which usually only lasts a few months, he has a good chance of a further, now higher, loan. And so forth. This reduces the risk of taking on excessive debts and each new microcredit is, so to speak, a reward that the previous loan was serviced on time.

Women are provided with microloans at an above-average rate. Not only to strengthen their often weak social position, but because they have proven to be extremely reliable borrowers. In Asia, the female borrower rate is well over 90 percent in some countries.

Above all, however, microloans are a contribution to equal opportunities.

The GOAL of the UN Sustainable Development Goals (SDGs) 2030 is to ensure by the year 2030 that all men and women, especially the poor and the weak, have equal rights to economic resources and access to basic services, property and control over land and to have other forms of ownership, inheritance, natural resources, adequate new technology and financial services, INCLUDING MICROFINANCE.

See also  What if Central America joined? Would it be an economic powerhouse?

How to proceed in the current situation

Due to the current corona pandemic and its effects on the economic situation in emerging and developing countries, which are still difficult to predict, microfinance institutions are reluctant to make new investments.

The focus of the microfinance funds we have selected is on long-term partners who want to support impact investors even in this challenging situation. The presence of digital channels helped ensure the business continuity of microfinance institutions during the crisis. Again, however, loan extensions are only granted after extensive risk reassessment.

In addition to the stimulus packages for the real economy, there is already strong financial support from the IMF / World Bank for many countries so that they can refinance their national debts and stabilize their currencies. In addition, Development Finance Institutions (DFIs), International Financial Institutions (IFIs) and other microfinance stakeholders have the resources and financing options to support the industry in times of crisis.

In principle, this asset class is steadfast in relation to market developments, as has historically been demonstrated during crises (WFK 2008/09, MERS 2012, EM Turbulenzen 2014/15). Even if the fluctuations in microfinance investments in the crises are significantly lower: The current extraordinary health crisis will also have an impact on the microfinance industry, whereby, according to the current state of affairs, the fund’s performance has not been affected by more than 2-3% due to careful accounting.

Against this background, we are sticking to our recommendation for this asset class.
Contact us if you would like to find out more about microfinance investments.

See also  In how many purchases to pay for a purchase with my credit card
Source: CAM, Bloomberg, DR VMF Portfolio

Leave a Comment