Microfinance, new investment trend

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Aug 2007
Singapore, August, 08 2007 - Citigroup launches two funds to leverage on Asia's interest in socially responsible investing and philanthropy.

Last year's award of the Nobel Peace Prize to a pioneer in the field of microfinance or micro-credit evoked surprise in many quarters.

It is likely that many in philanthropic circles sat up when Bangladeshi economist Mohammad Yunus was picked. Until now, microfinance - the extension of very small loans to the struggling poor - has hardly generated headlines.

But now wealthy individuals, and even the not-so-wealthy, in Singapore can get their feet wet in this evolving philanthropic area. Citigroup has just launched two microfinance initiatives targeted, on the one hand, at those who would like to make an outright gift, and, on the other hand, at those who are more comfortable with giving in the form of an investment.

Melanie Schnoll-Begun, Citi Philanthropic Services managing director, says the offerings are a first of their kind by any financial institution. 'This is truly a statement that we believe in this space. With the right advisory services, we can help clients move significant assets into the emerging marketplace.

'Clients are looking beyond pure contributions. You can only give so much money to open up more food banks. But by empowering people, teaching them how to feed themselves - that is really the only way to break the cycle of poverty. Our clients are looking to invest back into those communities. That's why this is really exciting.'

Merrill Lynch and Capgemini's recent wealth report indicated that socially responsible investing and philanthropy are areas of keen interest among the Asian wealthy.

Over the next few days, Citigroup is introducing clients in Singapore and Hong Kong to the two initiatives. So far, interest has been good, says Michael Troth, managing director of Citigroup Private Bank. 'There are clients with an absolute interest in just doing microfinance. Response has been tremendous. There are a lot more clients saying I want to know more about this, than those who say they are not interested. I think this will be successful. Internally, we wouldn't put this together unless our clients want it and we think we can raise significant money.'

The two-pronged effort comprises the Citi GIFT Microfinance Donor Fund and the Citigroup Global Microfinance fund. While they both help to fund microfinance institutions, there are distinct differences.

The donor fund aims to benefit emerging microfinance institutions, which are unregulated. They operate as non-profit organisations and need the philanthropic dollar. There is no expectation of a return, and the minimum US$50,000 donation is irrevocable.

US-based investors can enjoy a tax benefit, but for Asian and other non-US investors, Ms Schnoll-Begun says the benefit will be knowledge, which promises to be both in-depth and extensive.

Quarterly reports will be prepared by two independent companies, as well as conference calls with the leading personalities, including Nobel winner Muhammad Yunus himself. Mr Yunus founded Bangladesh's Grameen bank which extends small loans to the poor, especially women. The bank was set up in 1976 with just US$27 from his own pocket. As at last year the bank had 6.6 million borrowers.

Trips will also be arranged for donors to view the projects they are funding. The fund aims to benefit five key areas. One of these is rural finance to help entrepreneurs mitigate the risks, including weather, price and market risks. Other areas are technology innovation, energy services, life cycle financial planning to help the poor to accumulate assets, and capacity building.

Fees at an estimated 1.1 per cent a year are said to be much lower than any other donor fund where fees range between one and 3 per cent. '1.1 per cent is an incredible cost for getting access to such critical information. We subsidise some of the costs. We also recognise that this is not an area where we expect a large return. It's an opportunity to educate clients,' says Ms Schnoll-Begun.

With microfinance, a sum of US$500,000 would make a huge impact, unlike the US$100 million that may be needed to build a hospital. 'To get started this is a wonderful option. Our hope is that we give clients so much information that they will become much more comfortable to engage in this type of philanthropy through their own private foundations.'

While the allocations are yet to be decided, Citi will tap its local and regional networks to find Asian beneficiaries.

The Global Microfinance Fund, on the other hand, will invest in 'tier one' microfinance institutions which aim to generate a profit. The universe comprises about 150 institutions in 58 countries. The fund will be sub-advised by BlueOrchard Finance, a Swiss company set up to manage microfinance investment products. The fund aims to earn a return of Libor plus.

Citigroup itself will commit US$10 million to the fund, which is expected to raise a total of about US$100 million. Fees are expected to cost around 2.25 per cent a year.

On its website, BlueOrchard estimates that micro-bankers will need between US$10 billion and US$20 billion over the next five years to meet demand. Traditional sources of funding like client savings and the international community are expected to cover just 5 per cent of the needs. Hence, the need to tap capital markets.

It says returns are competitive, at about 100 to 150 basis points above monetary instruments. Volatility is expected to be lower than emerging market equities and bonds, and the sector shows 'weak correlation' with political, economic and even climatic events. What's more, specific risk is said to be low.

BlueOrchard says leading institutions are highly solvent, with loan portfolios of 'very high' quality. Default rate is estimated at 3 per cent a year, lower than many commercial banks.

Microfinance has its critics who charge that micro-loans' interest rates can be very high, and such credit still does not reach the poorest of the poor.



 

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