Investment: Microfinance

The final investment opportunity we will talk about in this series is microfinance – the practice of offering financial services (primarily small loans) to poor people who do not have access to standard financial services. Investing in microfinance is not going to make you rich, but it can give many people who (unlike you and me) were unlucky enough to be born into abject poverty a chance to better their lives. In principle, microfinance is therefore a highly ethical investment into our global society. 

Shares in most microfinance institutions will typically give similar returns to a long-term savings account with the same low risk. One could even argue that it is safer to lend your savings to poor people using it for productive purposes (through microfinance institutions) than to rich people who use it to buy all sorts of stuff they cannot afford (through normal banks). Indeed, artificially low interest rates and massive leverage achieved through fractional reserve banking and various forms of derivatives has brought many banks in developed nations to the point of requiring regular government bailouts in order to protect private savings accounts. 

But still, microfinance is not all sunshine and roses. There have been instances of irresponsible or even predatory lending which led to great social hardship and even suicides (for more detail, this article is a good place to start). That being said, however, most microfinance institutions genuinely want to make the world a better place and are slowly learning how to do this more effectively and more responsibly. In principle, microfinance is a great idea and, if correctly applied, has the potential to bring great benefits to society as a whole by giving opportunities to those who otherwise would be doomed to a life in abject poverty.

It is therefore highly recommended that you keep a small portion of your savings as shares in a microfinance firm. As always, you should make sure that you understand any risks involved, but risks and returns are often quite similar to a normal savings account with the only difference being the fact that your money will now be lent to poor people trying to work their way out of poverty instead of rich people buying ever bigger houses and cars.

Unfortunately, finding a convenient investment vehicle can be a bit tricky and you might have to do some digging on the internet. Here are some recommendations to get you started (1, 2, 3, 4, 5) together with a list of other possibilities. Good luck!

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