Backing micro-loans

WASHINGTON-During his trip to South America over the weekend, President Obama announced a new $100 million fund for microfinance in the Americas, designed to help shore up microfinance institutions with a scarcity of capital.

Microfinancing provides small loans to low-income entrepreneurs, most frequently in the developing world. The model is considered successful because of its high repayment rates. To provide accountability for borrowers, it depends on regular group meetings.

The goal is to grow the fund to $250 million, and money will be disbursed to seasoned microfinance institutions in Latin America and the Caribbean. According to a report by the Multilateral Investment Fund, these institutions could face a $750 million shortfall this year. The institutions have become increasingly ubiquitous in local economies, with 565 in operation, according to the report.

"They're putting money into organizations that have experience with microfinance. That gives me comfort," said Craig Cole, president of Five Talents International, a Christian microfinance organization. Government investment in microfinance is healthy, he told me, because it pushes job creation instead of government dependency. And that gives the poor dignity as they use their "God-given talents."

Muhammad Yunus-the founder of the microfinance institution Grameen Bank and considered one of the architects of modern microfinance, winning the Nobel Peace Prize for it in 2006-addressed Obama's program in a press conference on Saturday in New York. He said the $100 million fund was an extremely small amount of capital-the Grameen Bank lends more than $100 million a month.

"I still welcome it as a first step," Yunus said.

But Cole said, "You have to look at the leverage." Loans in the developing world are small, often around $300. "That's a lot of people that can be helped over a long period of time."

Yunus emphasized that the effectiveness of the fund depends on the structure of the disbursal.

"It should be recycling money, not giving away money," said Yunus.

The Grameen Bank is operational in U.S. credit markets and is expanding as traditional credit streams dry up-its first office opened in Queens, N.Y., a year ago, and staff plan to announce today a new branch opening in Omaha, Neb.

USAID already provides some funds for microfinance operations in the developing world, averaging about $100 million a year.