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Credit for carpets

Microfinance project allows Czechs to fund Mexican entrepreneurs, with interest

By Victor Velek
Staff Writer, The Prague Post
November 7th, 2007 issue

Photo courtesy of PAVEL KOHOUT
One myELEN client, Gloria, runs a carpet-making family business in Toluca, central Mexico.
Microfinance at a glance

Microfinance is a growing sector focused on providing banking services, such as loans, to entrepreneurs looking to lift themselves out of poverty
The concept dates back to the 1970s work of the Bangladeshi economist Muhammad Yunus. He advocates granting loans worth several hundred dollars to the poor, accompanied by educational and counseling support
Despite a spike in microfinance over recent years, about 400 million people live cut off from any financial services, according to the Grameen Foundation

Soon, local financiers will be able to grant loans across the Atlantic to entrepreneurs in rural Mexico.
Beginning this month, the portal myELEN.com will be the first institution to bring microfinance to the Czech Republic. A recently popularized banking innovation, microfinance programs allow impoverished people in the Third World — clientele traditionally seen as unsuitable for investment — to secure loans for their small enterprises.
“We want to be the pioneers of microfinance in the Czech Republic,” said Linda Hanyková, executive director of Microfinance, the company behind the My Electronic Loan Exchange Network (myELEN) project.
Through myELEN, investors can lend money to selected Mexican entrepreneurs — farmers, food venders, weavers, grocers — or associations of entrepreneurs, which are listed on the Web site along with their photos and business plans.
While microfinance has become a relatively common phenomenon in the United States, the myELEN project will be unique in Europe when it launches in several weeks’ time, Hanyková said.
Loans granted through myELEN would range between 5,000 Kč and 157,000 Kč ($267–8,396). The site will also allow investors to make donations or interest-free loans, Hanyková added.
Despite this option, the project should not be seen as a typical charity, shifting money from thickening Czech wallets to the Mexican poor. Rather, “it’s an interesting investment alternative,” Hanyková said.
Though it does bear an ethical streak, most investments made through the site will return annual yields between 5 percent and 10 percent, depending on the amount of money invested.
A typical concern when investing in the poor is the possibility of default, but microfinance investments have proven to be very safe, with only 2 percent of loans unrecovered, Hanyková said.
While small Mexican entrepreneurs have proven reliable, other factors, such as the volatility of currency markets, could jeopardize or lower the investment yields, she said.
Typically, microfinance loans come with one significant catch — the sky-high interest rates that arise from the costs of granting small loans and intensive fieldwork with clients.
Annual rates by microfinance institutions in Mexico run between 40 percent and 110 percent. However, local banks and other lenders charge even higher rates while providing little educational and counseling assistance to borrowers. Rates charged by myELEN would depend on the individual business and amount loaned, Hanyková said.
Today, myELEN cooperates with one partner in Mexico, an NGO named FIPS. But the project’s idea is to work with many other reliable microfinance institutions in Mexico and elsewhere, so that investments are diversified to reduce the risk of unrecoverable loans, said Tomáš Hes, an economist and one of myELEN’s founders.
Hes has followed the microfinance field for five years. After a career with the multinational banks Citigroup and Société Générale, he decided to dedicate himself fully to this quickly evolving field. Today, he works for FIPS in Mexico, where he is in charge of capital resources.
For Hes, microfinance is a field with enormous growth potential and the possibility of unleashing that potential is a great motivation.
“I’m working in uncharted finance territory, in a financial avant-garde,” he said. “The huge dimensions of this field, the volume of the demand and the social impact [of microfinance] are fascinating.”
Beyond Yunus
Traditional banking has long ignored the poor in forgotten parts of the globe, claiming it is too risky to give credit to penniless people. Yet even small bank loans — called microcredit — can be enough to help impoverished people escape destitution by establishing self-sustaining businesses.
Struck by this paradox, Bangla-deshi economist Muhammad Yunus founded the Grameen Bank in 1976 to tackle poverty through small loans to “insolvent clients.” Three decades later, Yunus and the Grameen Bank received the Nobel Peace Prize, helping popularize the microfinance concept throughout the world.
Today, the microfinance sector stands at a crossroad. There is a new breed of microfinanciers who want to commercialize the field, freeing it from its ties to donations and charity as a way of broadening its impact. Yunus, on the other hand, sticks to his original slogan — “credit is a human right” — and is skeptical of profit-oriented microfinance.
Hes stands somewhere between these poles. “In the future, nonprofit microfinance institutions must cooperate with commercial banks,” he said. Separately, neither will be able to cover the huge demand for microloans: Ninety percent of the potential demand has so far gone untapped, he said.
Hes says myELEN will help establish microfinance as a widely accessible vehicle for ethical investment in the country. These types of local investments are even more important in light of the subprime-mortgage crisis, as local markets can help hedge against the risk that arises out of increasingly interconnected global markets.
“Every global financial crisis caused by falling stock markets will increase the attractiveness of investments into closed, local systems,” he said.

Victor Velek can be reached at vvelek@praguepost.com


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