Microcredit Presents Investment Option in Economic Downturn

Feb 2009
Montreal, Canada, February, 01 2009 - As global stock markets plummet and the world’s economy slumps ever deeper, experts say investing in the poor through microcredit is proving both a secure and noble option.

While not completely insulated from market forces, microcredit or micro finance — the Third-World-inspired idea of lending small amounts of money to the poor so they can develop self-sustaining small businesses — is grassroots and more a part of the “informal economy,” Results Canada president Blaise Salmon says.

“Through the Asian crisis, say 10 years ago, one of the things we learned is that micro finance was surprisingly resilient compared to when there were failures with the main commercial banks,” he says.

“The micro-finance ones seemed to carry on without huge stress.”

A report released recently by the global non-profit anti-poverty organization’s Microcredit Summit Campaign, found more than 106 million of the world’s poorest families received a micro loan in 2007, surpassing a goal of one million set 10 years earlier.

Still, Salmon says that represents just four to 10 per cent of the worldwide demand, leaving a funding gap of about US$250 billion.

But with a default rate of just five per cent, most businesses are successful and yielding modest returns for investors and Salmon is hopeful the economic downturn will inspire more people to consider microcredit as a solid investment option.

“Normally you don’t really know what your money is doing when you invest in mutual funds,” Salmon says. “It could be companies you oppose.

“With this, on average every $200 you invest for a year creates one job somewhere in Asia or Africa so just think, say you put in $1,000, that’s five jobs each year that your $1,000 is creating and you get your $1,000 back at the end plus interest.”

The tiny loans of a few hundred dollars or less have helped housewives in Afghanistan develop tailoring businesses that employ their female neighbours, and allowed farmers in Bolivia to diversify their crops and effectively dig themselves out of poverty.

While the Canadian International Development Agency invested $76 million in microcredit programs in places like Asia, Africa and the Middle East last year alone, investing in microcredit is not simply the domain of charitable organizations.

The Citizens Bank of Canada, an online institution that specializes in ethical investing, now has about 658 clients across the country supporting global microcredit programs through term deposits and RRSPs.

Over the last 11 years, Citizens Bank members have contributed some $9 million to microcredit, says bank manager Elisabeth Geller, noting it’s among the few Canadian financial institutions to offer it.

Investments currently yield anywhere from 1.2 to 2.6 per cent interest, a drop due to the financial crisis.

“Not the best promotional rate in the world,” Geller admits, but it offers a “guaranteed return” and investors can be sure they’re “doing a good thing in the world.”

Geller says another 2,312 B.C. residents have made similar investments in their own communities through partner agency Vancity credit union which, for the last year, has allowed clients to direct their funds toward microcredit programs that are now benefiting about 150 poor entrepreneurs in the province.

The investments have, for example, helped a Jamaican immigrant rent space in a commercial kitchen so she could prepare homemade sauces to sell. It’s also helped people purchase computers to start home-based bookkeeping businesses.

“There’s a lot of literature that says microcredit in Canada doesn’t really work,” Geller says.

“What we found is when you invest in people, even $1,000-$5,000, which is the limit that we set for micro finance in Canada, it can make a real difference.”

Recent immigrants can’t always get access to traditional funding because they don’t have a credit history or require an amount too small for banks to bother with. Geller says that since September, the credit crunch has also had an impact on demand for micro loans

As people lose their jobs or find their hours cut in tough economic times, many will look for ways to supplement their income and may turn to microcredit, according to Geller.

“Part of what mitigates against demand perhaps here in Canada is that small amounts of credit are often available through credit cards,” she says.

“But as that business dries up... the demand is growing.”

On the investors side, Geller says people often become conservative with their cash and will hoard money in savings accounts during an economic downturn.

A guaranteed term investment in microcredit, she suggests, is an alternative that’s nearly as liquid.

It’s also attractive because it’s simple.

Geller says the marketplace has become a complex and confusing battlefield for Bay and Wall Street “wheelers and dealers” and their “trumped-up schemes.”

Microcredit is a reminder of what capitalism was designed to do.

“You don’t need to spend three years in grad school getting an MBA to understand this very basic principle of lending money to your neighbour... to make their life a better place and to get some return on that,” she says.

“I borrow a little bit, start a business, it creates jobs. It gets back to those basics.”

Source : Edmonton Sun

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