More than one billion people in the world live on less than a dollar a day. Generally speaking, these people are productive enough to survive, but do not participate in greater economic interaction. Many of them could expand their livelihoods with just a little bit of capital ? sometimes a loan of as little as $100 can permanently bring a family out of poverty. Therein lies one of the most interesting ways to help alleviate poverty. What makes microloans so interesting is that they not only produce social benefit, but that they can be profitable, as well.
Over the past 20 years, an estimated 7000 organizations and institutions dedicated to microfinance have been created around the world. But many of these organizations are struggling to become and remain sustainable.
Among the challenges are optimizing repayment rates, selecting successful interest rates, and minimizing overhead costs. Also, some critics have charged that microfinancing reaches only the ?upper levels? of the poor, leaving the very poorest even further behind the norm. In spite of these challenges, microfinancing won a new ally last week.
Co-founder and CEO of eBay Pierre Omidyar donated $100 million to Tufts University, his alma mater. But unlike a typical donation that might be incorporated into a university?s endowment, Omidyar and Tufts have established the Omidyar-Tufts Microfinance Fund.
While this sizable influx of cash will certainly bolster the microfinance sector, even more important is the statement Omidyar and Tufts have made with the establishment of their fund. Much of the money that has fed microfinance institutions in the past has come from philanthropic donations. In this case, Omidyar and Tufts are looking to the sector to pull a profit.
Fifty percent of the fund?s returns will be available for Tufts to use in advancing important programs, such as support for faculty and various forms of financial aid. The other half will be reinvested into the fund.
Successful results such as better-than-market returns and a positive impact on the loan recipients will lend great credibility to the microfinancing initiative, potentially luring more capital into the market and thereby helping more people.
?We believe that business can be a tool for social good. Microfinance has already shown that enabling the poor to empower themselves economically can be good business,? said Omidyar in a press release. ?By engaging Tufts as an institutional investor in microfinance initiatives, our hope is that the microfinance industry can better meet the demand for financial services among the world?s poor, while also demonstrating its potential commercial viability to a wider institutional investor audience.?
Microloans are generally made over a short term, so each dollar can be lent up to four times per year. At the same time, Tufts would be able to borrow additional money against the balance of the loans several time per year. In the end, the fund could leverage as much as one billion dollars in loans.
The fund will be managed by an independent supporting organization controlled by a board of trustees, with the expectation of risk-appropriate financial returns. The loans will be made through existing service providers such as Deutsch Bank, MicroVest, and on-the-ground microfinancing institutions, according to The Chronicle of Higher Education.
?I applaud the Tufts program,? stated Carnegie Mellon University Provost Mark Kamlet in an e-mail. ?I would think that if they design the program well, there would not be major risks to the University in terms of liability.?
This sort of creative, socially minded investment strategy is a model for other investors ? private and not-for-profit alike ? but there?s no reason we soon-to-graduate college students can?t take inspiration from this example. With a little creativity and vision, it?s not that hard to do well by doing good.