Micro-finance has received much publicity about its overseas operations in India, Latin America and eastern Europe. Its business is making the smallest loans to the tiniest entrepreneurs, who usually run one-person operations.
There are said to be about $2.5 billion invested by private investors, on the premise that borrowers who take as little as $100 or so at a time are good risks.
Some borrowers receive 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%. That’s better than from past financial meltdown records.
Well over 230 micro-finance investment institutions are now in the business. Little regulations exist. But the reported default rate is suspiciously low.
A decided moral hazard does exist. Even the most determined entrepreneurial but poor of the borrowers will have to feed themselves and their families before loans are repaid.
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