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 Business News | January 2007 
Microfinance as a New Asset Class - Ecological Revolution in Finance
 Tomas Hes - PVNN
The current form of neo-liberal globalization is under fire of criticism. As far as international trade is concerned, the world is still barb wired: trenches are deep and free trade continues to be an utopist vision. Capital markets are apparently more flexible.
Whereas the great international trading corporations need back-up of diplomatic squads, the world's financial standards are getting shaped on global capital markets, where small percentages between interest rates decide upon the direction of capital flows.
But capital not based on creation or exchange of real goods or services doesn't alleviate the global disparities. As long as the interest rate on capital markets remains lower than growth rate of the real GDP and the average profit margin, corporations take credits, widen the production process and gear up the productivity, while bad debt stays low.
But once the real interest rate exceeds real GDP growth rate, the debtors get poorer and capital owners grow wealthy: hence the everyday reality of developing countries. Globalization impacts the employment through higher growth of productivity in comparison to GDP growth, having serious consequences for the debtor, as real interest rates grow: while lenders are in advantage. Consequent unemployment and accumulation of wealth harms the growth of productive assets in developing countries.
Capital markets of today, nor international trade, are thus not addressing the needs of the poor Third World as much as they could - and should. They suck out the added value in form of high interest and move it elsewhere. International trade, distorted by customs curtains and subvention, does not follow direct market logics and financial markets become an instrument of widening inequality.
But there is more than that: volatility of capital markets presents a danger to all, especially to reserves lacking impoverished nations. As the financial system becomes increasingly integrated, crises originating in one market are likely to spill across national borders and cause disruption elsewhere. Speculative capital is the cause for major financial crises of the twentieth century.
The main problem of financial markets is that the surplus of capital presses the local yields to low levels. The owners of capital have to look abroad to invest. Only 2 percent of the finance are used for direct payment: the rest is a bet into the unknown, in the form of credits and speculations.
While world trade turnover doubled in the 80's and 90's, FX markets increased 6 times and derivatives increased almost 9 times. The "financial pyramid" is being maintained by growth of financial speculations including the speculations with raw materials. The system is thus based on imbalanced exchange between worlds and uncertain hopes, and not on real goods.
The world derivatives bubble is inter-linked across countries and markets, bonds, stocks, currencies, commodities: a failure in one part of the market may trigger the disintegration of the entire system. The bubble is central to the functioning of the capitalist economy and vital to the political stability of the "casino society," "the financial explosion," or "the credit bubble," as some call it. The primacy of appearances gives way to primacy of reality.
Some economists are convinced that collapse is inevitable. Chairman of the US Federal Reserve and people like George Soros have made statements about imminent financial crisis. Few doubt collapse of the financial system would be a disaster for the whole of mankind. The risks are embodied in the system, and are steadily growing higher.
Large scale solutions may be possible: the present dollar-based speculative financial system could be improved by coming to a global agreement on financial policies, common reserve fund, global regulating authorities and politically neutral world currency. But there is little chance that round table will be the place to build new financial architecture: the incompatibility of goals of states struggling for power and influence doesn't allow much dialogue.
Visions of major financial crisis are visions of horror: states falling apart, millions of people fleeing in panic, hunger, chaos, violence, diseases spreading rapidly, democratic regimes overthrown by dictatorships, wars. It's time to look for systemic answers.
As described above, financial and trade markets by themselves do not provide solution to the world's misery. Precisely for this reason, global institutions, such as IMF and the World Bank were created in the past.
However, many are convinced that they pursue new form of economic and political subordination of the 3rd world governments through seemingly neutral interplay of market forces, driven by international creditors, multinationals and clubs such as G7, Paris and London Club.
If we do not take into account paternalism, non-transparent and many times inefficient charity, is there a way that a conscious individual could fight against powerful financial and political interests of our untouchable elites?
How absurdly it may sound, there might be a grass root solution to the ghastly looking discrepancies: a solution coming from the bottom. In autumn last year, a modestly looking academic from Bangladesh received Nobel prize for Microfinance.
Microfinance, banking for the poor, allows to disburse small amounts of capital to groups of poor entrepreneurs, who are jointly bound for the loans of their peers. Social guarantee is surprisingly efficient: bad debt of well-run institutions stays under bad debt ratio of commercial banks.
Today, Microfinance institutions are mushrooming throughout the developing world: some clearly look for financial profit, some are after humanitarian effect, some have already passed critical mass of clientele and acquired banking license.
It is not uncommon, such as in case of Indian ICICI Bank and Microfinance group SHARE, that formal retail banks are buying whole portfolios of rural clients or even whole institutions, in deals million dollars deals.
Microfinance, for so long overlooked and disdained, is getting respect of the biggest banking players, who are creating funds, getting ready to attack. The future of banking lies in unbanked regions: the perspective is in the potential of forgotten markets of hundreds of millions of virgin clients.
Fascinating indeed, but where is the link between groups of small debtors in the deserts, plains and jungles of the 3rd world and plasmatic streams of trillions hurling between financial super-centers? The secret lies in appeal of high interest rates: and new investment attitude.
There are more than 400 millions of small entrepreneurs in developing countries, who desperately need credit for their productive and commercial endeavors, boosting trade creating jobs, cutting down dependency and disparity.
At present, only 5 percent of the demand is satisfied. As they don't live in the cities, do not fill in financial statements and dispose of poor collateral, no bank will ever lend them.
Informal work, black and grey markets are in most developing countries central to their economies: but economic doctrines grudgingly fail to consider them seriously. However, now there is a link, a way how to tie them into the formal economics and by formalizing their financial exchanges, slowly transforming into taxpayers.
Despite isolation, many of their business project are sane and highly profitable. Precisely there lies the potential for high interest rates that micro-financiers charge, in exchange for difficult, costly and complex credit operations, frequently exceeding 50% per annum.
Administration of minuscule sums and weekly visits to regions without infrastructure miles away from civilization is a challenging, consumptive and uneasy task: therefore labeling Microfinance "usury", would be a grossly misleading mistake and offence to pioneers of finance.
Summing up: why invest in speculative capital, menacing the financial stability of global capital system, if you can invest into credit operations of serious, yet evidently poor businessmen in the 3rd world, for a similar return?
Why leave idle savings in your banking accounts, for ridiculous interest rates, when you can get over 10 or 12 percent p.a., support productive poor and promote the world's sustainability? Why pour money into non-transparent charity if you can do good by investing into genesis of wealth by those who can help themselves?
Financial sector is another field of human adventure, where Revolution of consciousness is taking place. A new asset class is getting born. Sooner or later, any investor must inevitably think of the complexities that surround us, driven by individual decisions, and act under the sign of investment ecology, avoiding speculation and instead investing into the production of real goods created by the hands of real people, that make the world a better place.
Only a few Microfinance institutions are ready, or able to see, the potential behind the New investment paradigm, approaching us to Agorism, libertarian vision whose goal is a society in which all "relations between people are voluntary exchanges."
One example of futurist proto-financial institutions is Mexican FIPS AC, a fascinating private Microfinance company disguising an explosive innovation potential.
FIPS AC, which today serves 10,000 small entrepreneurs spread over the Mexican federation, not only keeps on building robust capital bridges between Europe, US and Latin America, but also enables European and US micro-investors to obtain high interest rate via tailored investments into super-diversified portfolios of Mexican micro-entrepreneurs.
Parallely, these US-Mexican pioneers seek export markets for the most outstanding debtors, closing the economic circle. Successful international sales support repayment of invested foreign capital reduces world discrepancies, satisfying all actors - and proving to the world that new attitudes can be profitable for all participants.
If this new angle on personal investment strategies finds a solid global infrastructure platform, we could expect that structure of savings and investments of western society will undergo massive changes: away from idleness and speculation, towards healthy investment risk, focused on production and trade, creating employment, diminishing disparities and empowering.
Tomas Hes works in Latin-American Microfinance with FIPS-AC, a Microfinance institution focused on the development of Mexico's marginalized communities in both rural and urban environments through innovative financial, commercial and organizational methods. For more information, visit fipsac.org |
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