(WOMENSENEWS)--Microfinance may be all about small loans to women running tiny enterprises such as selling fruits and vegetables off a cart.

But for the world of finance it's also become a big business.

After growing by between 20 percent and 40 percent a year for the last decade, microfinance now involves about 10,000 lenders and at least 50 million borrowers. With loans averaging around $530, billions of dollars are reaching struggling entrepreneurs around the world whose incomes are too low to qualify them for traditional bank loans.

With some 3 billion people living on less than $2 a day, the client base of people too poor to qualify for traditional bank loans has plenty of room to grow, say industry participants.

"There's a fortune at the bottom of the pyramid," says Julie Stahl Peachey, regional director of the Asia Programs for Grameen Foundation USA, a Washington, D.C., microfinance organization with a global network of 46 partners in 20 countries. "There's a whole population of unserved poor that are bankable."

Today's booming microfinance bears little resemblance to its early days in the 1970s, when it began as a small, highly experimental program backed by a central bank in Bangladesh. That micro-aid program became known as the Grameen Bank.

Since then borrowers--the vast majority of them female--have established a stellar repayment track record, making them more and more "bankable."

"What we're seeing is a merging of traditional microfinance and the new commercial players as MFIs reach up and commercial banks reach out to the new markets of poor clients," says Elizabeth Littlefield, chief executive of the Consultative Group to Assist the Poor, a Washington, D.C., consortium of 29 bilateral, multilateral and private donor institutions working to serve low-income people in developing countries.

Not only have big international banks such as Citigroup, Deutsche Bank, Credit Suisse and ABN Amro entered the market, so have many domestic commercial banks in developing countries. The Consultative Group has identified over 200 domestic retail banks or consumer credit companies extending microfinance in countries such as Egypt, South Africa and Brazil.

"They are driven by competition and technologies that promise to allow them to make smaller transactions more cost effective,"says Littlefield. "High repayment rates amongst loans for the poor--often 97 percent to 98 percent--and the surprising resilience of the market, make it an attractive proposition."

High Interest Rates Common

The interest rates on microfinance vary, but high annual rates--of between 25 percent to 50 percent rates--are common, says Josie Sentner, director of resources at Pro Mujer International, a New York City-based not-for-profit network comprised of four microfinance organizations in Latin America.

Littlefield says that while such rates are high, they are still much lower than the alternative, where informal moneylenders offer rates that often exceed 10 percent a month.

A study by the Consultative Group indicates that a standard moneylender loan in the Philippines is the "5-6 loan" requiring that for every five pesos borrowed in the morning, six must be repaid by evening, a daily interest rate of 20 percent.

Nancy Barry, president of Women's World Banking, a New York City-based global, nonprofit network of lenders and banks that offer credit to more than 12 million people, has witnessed banks in South Africa that charged a monthly interest rate of 30 percent and required a family member of a borrower to work for the bank so wages could be garnished in case of a default.

The Cost of Tiny Transactions Are High

Microcredit is expensive, some participants say, because of the expense of processing tiny transactions. The key, says the Consultative Group's Littlefield, is for microfinance institutions to increase efficiency. "As transaction costs drop, that in turn should lead to lower interest rates," she says.

Growing competition could also lower interest rates as more players vie for business.

With borrowers paying back their loans at such a high rate, their low default risk should be taken into consideration, says Peachey of Grameen Foundation USA.

"It's difficult to say what range would be acceptable since the rates are driven largely by the market. In some instances the rates are comparable to the credit card rates that many Americans face," says Peachey. She adds that microfinance should not entail a profit margin of more than 5 percent.

While some governments have imposed mandatory interest-rate ceilings, the Consultative Group has found this has made it difficult for formal and semi-formal lenders to cover their costs and has driven many away from the market or prevented them from entering it. Ceilings can also lead to less transparency about the costs of credit, as lenders cope with interest rate caps by adding confusing fees to their services.

Some creditors, such as the New York-based Women's Venture Fund, offer particularly good terms. It extends customized loans of up to $15,000 at a rate that is just 2.5 percentage points above the so-called prime rate that banks charge their most creditworthy customers.

The New York City-based non-for-profit makes loans in and around New York and considers women in any industry who can't get money from conventional lenders. The group plans to lend nationally in the next year or so.

In addition to financing, the Women's Venture Fund offers borrowers a comprehensive program that includes training and business assistance.

Whether more of the microfinance market will follow the example of lenders such as the Women's Venture Fund is an open question for industry participants who want to ensure that, whatever happens, low-income women continue to expand their access to credit.

"Microfinance is in a delicate place right now," says Barry. "Microfinance will be more mainstream even in the next five years, especially with communications and technology to enable massive distribution. We just need to make sure we get the basics right."

Sheryl Nance-Nash is a freelance writer based in Long Beach, N.Y., specializing in personal finance, business and small business.

For more information:

World Bank Puts Money into Women's Work:
http://womensenews.org/article.cfm/dyn/aid/2106/

Experts Question Wisdom of Micro-Credit for Women:
http://womensenews.org/article.cfm/dyn/aid/1239/

Grameen Foundation USA:
http://www.gfusa.org/

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