Microfinance is becoming increasingly common in developing countries. With the help of micro loans, people that are excluded from the mainstream financial system can get access to finance to be able to buy for example smaller machines, tools or materials to get started or expand a business.
“More than 50 per cent of the end borrowers in the funds are women. The amounts that these entrepreneurs need to borrow to finance their business are so small that they are not commercially interesting for mainstream banks. The idea of the micro financing is to enable entrepreneurs to start or expand a business that generates an income which makes it possible for them to repay the loan and in addition give them access to other types of financial products such as savings, insurance and payment services, says Camilla Löwenhielm.
According to Hetal Damani, microfinance is crucial for sustainable economic growth in emerging markets.
– Microfinance is about financial inclusion and focuses on those who do not have access to the traditional banking system. Today the funds provide loans to some 20 million entrepreneurs in 40 countries via 120 microfinance institutions.
“End microfinance clients are, for example, street vendors, taxi drivers or farmers. These entrepreneurs are less impacted by events that take place in the world and that affect other parts of the financial market, which makes microfinance less correlated with other asset classes”, says Hetal.
What is behind the growing interest in microfinance funds?
“It is the possibility to improve the living conditions of the poor in developing countries while earning a stable financial return on the investments. As an investor you get a chance to contribute towards the UN’s Sustainable Development Goals – including for example eliminating poverty, reducing inequality, contributing to decent working conditions, economic growth and gender equality. The funds also give investors access to markets they normally wouldn’t have access to”, says Camilla.
“The idea is that the funds will generate a stable return with low financial risk. The risk that a borrower can not repay the loan is generally quite low since the loans are short with frequent amortization. Moreover, the portfolios have a large number of underlying borrowers, which creates good diversification, says Hetal.
Today, only so-called "professional investors" are able to invest in the funds.
"We have looked at different options for private individuals, but so far, regulations have made it difficult to distribute the funds to all customer segments that are interested. We hope, of course, to find a solution to this since we know there is a great interest. On the other hand, private individuals can indirectly access the funds through savings in SEB's traditional insurance product”, says Camilla.