Microfinance loans – for Americans

Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.

The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.

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Grameen has lent $50,000 in the past month to groups of immigrant women in Jackson Heights in New York’s borough of Queens. During the next five years, it plans to offer $176m in loans within New York city, and then expand to the rest of the US.

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In the US, about 28m people have no bank accounts and 44.7m have only limited access to financial institutions. People often do not hold bank accounts because they have had credit problems, have no access to a local branch or they distrust the mainstream financial system, said Jonathan Morduch, a microfinance expert at New York University.

Some microfinance experts doubt that Grameen could make an impact in the US where credit is widely available, and businesses and tax systems are much trickier to navigate than in developing countries.

Very amusing. And to think of all the bad press Hugo Chavez got with his oil. From a previous article:

The US presents a ripe market for Grameen, Mr Yunus claims, because it has a large population that sits outside the formal banking system. As many as 28m people, earning $510bn a year, do not have any relationship with a financial institution, according to the Federal Deposit Insurance Corporation.

Those who have no bank accounts rely on fringe banking services such as cheque cashers, pawnshops and payday lenders.

Payday lenders can charge as much as 1,560 per cent for a week’s cash ad- vance against forward-dated cheques, according to the Consumer Federation of America. Payday lenders made $48bn (€33bn, £24bn) in loans last year, while pawnshops’ business has been soaring as the US heads into a slowdown.

“You have the payday loans, you have the cheque cashing companies, and they’re flourishing, and they are pretty bold, the big advertisements in the newspapers, big ads on television . . . so this shows how much [of a] gap there is in the system,” Mr Yunus said.

I can understand the argument about the greater complexity of the tax system here – although that supposes that recipients are engaging with the tax system fully. A decent proportion of those Americans without bank accounts are Americans without papers, too, I would expect. One hopes his doesn’t wind up leading to a load of poor dream-chasers simply having those hopes dashed by the cruelty of the tax system (you know, the one that now doesn’t chase rich tax-evaders/avoiders, just middle-class-and-lower tax-evaders/avoiders).

Assessing risk in microfinance – could it possibly be worse than normal finance, these days?

Very interesting story in the Financial Times, just spotted. At a time when microfinance is growing rapidly (and doing wonders), it is apparently constrained by a lack of transparent assessability of risk.

…some experts say there are obstacles preventing the microfinance sector from reaching its full potential, including the absence of a global framework that mainstream investors can use to assess properly the risks associated with the sector.
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Activity in the microfinance sector has been growing in the last few years and has involved increasingly complex deals. Last month, for instance, the first publicly rated microfinance collateralised debt obligation – which pools together packages of bonds – raised more than $100m. The deal was rated by S&P and completed by BlueOrchard, which specialises in the management of microfinance investment funds, and Morgan Stanley.
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S&P expects to rate an additional two to three microfinance CDO transactions and around 25 MFIs in the coming months, with CDO issuance levels potentially reaching $500m by the end of 2007. As the existing microfinance institutions become adept at handling new inflows of funding, and more MFIs enter the market, securitisation volumes could reach between $1bn and $3bn annually over the next decade, the agency says.

You know, those number might need re-doing. I don’t know how potentially risky debt from developing countries will fare in a market that can’t sell CDOs from the US.

The amount of U.S. high-grade, structured finance CDOs that are being offered to investors has plunged to $3 billion, from $20 billion a month ago, JPMorgan said in a report dated yesterday.

(I got that story via Calculated Risk) Yes, I expect BlueOrchard to be less risk and yield-happy than Bear Sterns or the ordinary hedge fund world, but we’re talking about basically the same thing. The way things are heading, I think microfinance is better off without. Anyone investing in CDOs – or investing in debt at all – is probably getting quite jumpy just now.

Also, via the Big Picture, a story from the Bloomberg markets magazine about the over-exposure of pension funds to CDOs. I’ve intimated before that I consider any exposure by pension funds to risky debt to be too much, but they’re being sold the riskiest of the risky debt – are they just plain stupid? More likely they realise that they’re dealing not only with Other People’s Money, but other people 40 years from now. Not likely to promote proper risk assessment. Which is kind of where we came in…