Pension funds turn to the low-risk area of microfinance (Financial Times, Friday, October 9, 2009)

Pension funds turn to the low-risk area of microfinance

By Kate Burgess

 

Published: October 9 2009 03:00 | Last updated: October 9 2009 03:00

 

Microfinance, where financial institutions back start-ups and would-be entrepreneurs in the poorest parts of the world, is little more than a gleam in the eye of most of the biggest banks.

 

But it is one area of subprime lending that still has a reputation for being relatively low risk in spite of the financial crisis, and it is attracting new investment.

 

Some of the biggest pension funds have increased their investments in microfinance this year and expect to raise it further in the near future.

 

Analysts estimate that the microfinance industry has lent anywhere between $25bn and $60bn compared with, say, Royal Bank of Scotland, which alone has assets of $3,500bn.

 

Pension funds have so far invested about $3bn, according to a report by the World Microfinance Forum in Geneva. But investment is rising. The latest fund to lift its commitment is PGGM, manager of the €70bn ($103bn) Dutch healthcare industry pension fund, which is committing €200m to microfinance, making it one of the largest allocations to the sector.

 

ABP, one of Europe's biggest pension funds with €180bn in assets, has invested $180m in microfinance and says it has raised its commitment by $40m this year. It expects this commitment to rise again in the next few years.

 

The draw for retirement schemes is that microfinance has paid out returns as high as 20 per cent a year while fulfilling an aim to lift households out of poverty.

 

Alex van der Velden, PGGM's head of responsible equity strategies, says the MFIs of today will be the emerging market banks of tomorrow. Microfinance started nearly 40 years ago when Muhammad Yunus lent $27 to a group of women in Bangladesh making furniture. Banks had been loath to fund such tiny operations, fearing risk.

 

But Mr Yunus, who founded Grameen Bank, and economists found these groups were mostly good credit risks, paying back loans fast and often borrowing more to expand.

 

Lending institutions - non-governmental organisations, local co-operatives and banks - found lending to these people was good, repeat business.

 

MFIs helped improve living standards, transforming and empowering marginalised groups, particularly women, in some of the worst slums and ghettoes.

 

By 2006 it was estimated that 90m people were borrowing from MFIs to fund cottage industries.

 

Now funds have been set up to fund the MFIs.

 

There are sceptics. The WMF in Geneva reported that European pension funds worried the industry was too small to make a difference to returns while being expensive and time-consuming to manage.

 

But Mr van der Velden says: "Microfinance institutions are seen as an antidote to loan sharks. They introduce competition to loan sharks, driving down interest rates. It will be an asset class of significance in the years to come. If we wait to invest, by the time it is mainstream, we will have lost most of the opportunity."

 

 

 

Michael Tillman

Columbia Business School

MBA Class of 2011

email:  MTillman11@gsb.columbia.edu

mobile:  646-420-1930