Thursday, August 13, 2009

Micro-credit bubbling over in South Asia?

Microfinance has been the in thing in the development world for quite some time, with Muhammad Yunus, who won the Nobel Peace Prize for setting up Grameen Bank, the man of the moment.

But an interesting piece in today's Wall Street Journal suggests that a microfinance bubble could be forming in India (the story is behind a paywall here but I've pasted the intro below).

The WSJ story seems to tally with what I heard when I was in Bangladesh back in June. One businessman who ran a charitable foundation told me that his organisation was having to move away from micro-credit provision because the market was so saturated.

While the idea behind microfinance was that it would provide poor entrepreneurs with access to much needed funding, in reality the rapid expansion of credit was driven by consumer spending on new TVs and mobile phones.

It's hard to argue that individual Bangladeshi or Indian farmers shouldn't be lent money to buy things that make their lives more enjoyable but we all know the risks of rapidly expanding credit to fund additional consumer spending.

RAMANAGARAM, India -- A credit crisis is brewing in "microfinance," the business of making the tiniest loans in the world.

Microlending fights poverty by helping poor people finance small businesses -- snack stalls, fruit trees, milk-producing buffaloes -- in slums and other places where it's tough to get a normal loan. But what began as a social experiment to aid the world's poorest has also shown it can turn a profit.

That has attracted private-equity funds and other foreign investors, who've poured billions of dollars over the past few years into microfinance world-wide. (See related article "For Global Investors, 'Microfinance' Funds Pay Off -- So Far" -- WSJ August 13, 2009.)

The result: Today in India, some poor neighborhoods are being "carpet-bombed" with loans, says Rajalaxmi Kamath, a researcher at the Indian Institute of Management Bangalore who studies the issue. In India, microloans outstanding grew 72% in the year ended March 31, 2008, totaling $1.24 billion, according to Sa-Dhan, an industry association in New Delhi.

"We fear a bubble," says Jacques Grivel of the Luxembourg-based Finethic, a $100 million investment fund that focuses on Latin America, Eastern Europe and Asia, though it has no exposure to India. "Too much money is chasing too few good candidates."

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