Thursday, May 10, 2007

Microfinance and rural development

The provision of microfinance on reasonable terms has been a driver of small scale rural development and poverty relief in many developing countries. It is not a panacea, and other structural issues still need attention, but it definitely plays a significant role in aiding the transition to a decent life for many financially disadvantaged people mostly in developing countries.

Recently it has been reported by the International Herald Tribune that Morgan Stanley - a major international financier - is selling collateralized loan obligations that finance Peruvian shopkeepers, Cambodian rice farmers and Nicaraguan potters. The giant securities firm has said that it was seeking to raise USD 108 million through the sale of collateralized loan obligations, or CLOs, which are securities that package underlying loans and use the income to pay investors.

The money raised will go to institutions that lend to 70,000 low-income borrowers in 13 developing countries, according to a statement released last week by Morgan Stanley and the microfinance asset manager BlueOrchard Finance in Geneva. Morgan Stanley is widening the number of institutions that can invest in small loans to the developing world by putting the debt in securities with credit ratings as high as Wal-Mart Stores, the world's largest retailer, and the drug maker Eli Lilly. This arrangement allows many institutions who could not [ often due to restrictions on the quality of debt or investment grade taken on] or would not provide direct finance, to have a more secure vehicle with much superior credit ratings as the financing institution.

Morgan Stanley is building on a microfinancing industry pioneered by Muhammad Yunus, who won the Nobel Peace Prize last year for his work lending to impoverished people in Bangladesh, where he was instrumental in developing the Grameen Bank. This model has been followed in many other areas.

This is a very very significant move that will potentially make much greater finance - ie cash - available for this burgeoning micro finance sector, a major area especially in the developing regions. This form of micro finance has been a huge success with very minimal loan defaults, as well as the huge personal and lifestyle gains by many local people, often women and poor farmers contributing to improved living conditions. There are many success stories in Asia.

Good one!

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