Juan Alberto Davila has gone green. A farmer who grows beets and potatoes in San Isidro, Nicaragua, Davila recently borrowed $700 to buy a solar panel that he installed on the roof of his tin and mud home. The panel generates enough electricity to run four light bulbs, a television and a radio-items that are so extravagant in his village they have made his home the hub of activity. The electricity has also enabled Davila's 10-year-old son Alexander to play outside after school, something he couldn't do before because he needed to use those daylight hours to do his homework. He couldn't do it at night because their home had no light.

"He got his childhood back," says Jon Bishop, whose company, Madison, Wis.-based Envest, helped finance Davila's loan.

Welcome to the world of microfinance, a market in which small loans are made to people so poor and lacking in credit history that they are not even on a bank's radar. Most of these people, as it happens, have proved to be more responsible at repaying their loans than their more accredited counterparts in developed countries.

"People think because he's poor, he won't repay. But there are literally millions of examples of when you do the due diligence correctly, the poor are particularly good risks," says Bishop.

Of course, you can't just go into a slum and start lending money, but if you look at the institutions that understand the community and the financial sector, you'll find their default rates-about 1%-are something the American banks would envy right now, Bishop says.
"I'd much rather have my money in microfinance than in mortgage-backed securities."

The average loan sizes vary, from $300 in places like Nicaragua and India, to $1,000 for countries in Eastern Europe. Default rates are low in part because the borrowers often take on the debt in groups and guarantee each other's loans (some 70% of microfinance loans are group loans). But it's also because loan officers at micro-financial institutions know their borrowers well-something that can't be said of the large banks that made subprime loans. Loan officers not only know what their borrowers look like, they probably know what their children look like and what they're studying-because they've driven to their borrowers' houses once a month to collect their loan payments.

Bishop says when he went to visit one of the microfinance institutions in Nicaragua in which invests, the loan officer came back to the office splattered in mud because he'd just driven miles and miles on a motorbike through the hills and valleys of Nicaragua-something he does every month-to collect his customer's interest payments.
Bishop's fund-which has a minimum investment of $5,000-offers investors notes that pay 5% to 7% interest, depending on the size and length of the loan. The money is then invested with a couple of microfinance institutions in Nicaragua. To date, not one has defaulted.
Envest is just one of several funds in this expanding marketplace. While emerging market funds have experienced a 20% sell-off, the assets of the top ten microfinance investment funds grew by 32% in 2008. As of December 2008, there were 104 active microfinance investment funds, with total estimated assets under management of $6.5 billion, according to the CGAP (Consultative Group to Assist the Poor), an independent microfinance research organization housed at the World Bank.

Retail investors helped fuel that growth. The responsAbility Global Microfinance Fund, based in Switzerland, for instance, grew 96% in 2008. It doesn't hurt that microfinance was one of the few asset classes to end 2008 with positive returns.

Among the most popular retail products are Calvert Community Investment Notes. These pay a consistent return for the social-minded investor, and the product, which is very established, is fairly liquid and transparent. Other retail products include the PlaNet Finance Fund and MicroPlace, a microfinance broker owned by eBay that enables people to invest as little as $20 in a variety of microfinance products, including notes from Calvert or Oikocredit, a Dutch company that makes loans to microfinance institutions.

Some advisors say they like MicroPlace because it's very user friendly. Users open an investment account, as they might at Schwab or any other brokerage. They then choose an investment based on some social need, a region in which they want to invest, or a level of return they hope to make. They can then make their investments through PayPal or a bank account. At maturity, the principal and interest is deposited directly into those accounts.

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