Microfinance gives small-scale financial services such as loans, savings, insurance and money transfer to poor customers who would otherwise not have access to banking services. Microcredit, an important component of microfinance, involves offering very small loans to poor clients without any collateral and often without any written contract.

First championed by the Nobel laureate Muhammad Yunus in Bangladesh, microfinance has gained a reputation for near-zero default rates and a stable rate of return over the long term for investors. These returns are estimated at about 6% a year, with the best-performing funds returning three or four times that amount.

Healthy and stable returns, combined with the feel-good factor of supporting a social cause, mean microfinance is of increasing interest for investors. Microfinance institutions have traditionally relied on clients’ savings, donors, aid agencies and commercial borrowing for funding. But new sources of funding have emerged in the past two or three years. These include socially responsible investment funds, venture capital funds with a social cause, private equity funds, multinational banks and capital markets, according to the Consultative Group to Assist the Poor (CGAP), a leading advocate of microfinance.

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