Micro-finance has gotten lots of publicity about its use overseas, particularly in countries such as India, Latin America and eastern Europe. This is a business of making the smallest of loans to the tiniest entrepreneurs, who usually run one-person operations.
There are said to be about $2.5 billion invested by private investors in such projects, on the assumption that borrowers who take as little as $100 or so at a time are good risks.
Some borrowers are said to receive a total of as much as $400 over a few years. Fund investor return is supposedly about 5% and the default rates are said to range a bit more than 2%. Much better than from the past financial meltdown records.
Problem: Well over 230 micro-finance investment institutions are now in the business. There is an acknowledged bubble forming. Little regulation exists. Furthermore, the reported default rate is suspiciously low.
When push comes to shove, a decided moral hazard exists. Even the most determined entrepreneurial but poor of the borrowers will have to feed themselves and their families before loans are repaid.
The potential losses for investors can then be serious.
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