WSJ.com - A New Way to Do Well By Doing Good

This idea seems to be really gaining traction. For more on the feasability of such projects, read any work by C.K. Prahalad such as "Bottom of the Pyramid...Eradicating Poverty through Profit"...

WSJ.com - A New Way to Do Well By Doing Good: "Making tiny loans to poor entrepreneurs in developing countries has long been a popular charitable cause, but it is now gaining traction as an investment.

Microfinance, as these loans are known, is aimed at lifting some of the world's most destitute people out of poverty by providing seed money for small businesses. Funding for the loans traditionally has come from charities and government-aid organizations. Now, an increasing number of private funds are steering capital to microfinance -- and demanding a return, albeit a modest one in single digits, on their investments. By doing so, the funds hope to boost microfinance's reach and efficiency, while also drawing more capital from investors."...

Many of the new investment instruments have been launched by nonprofit organizations long involved in the industry, including Grameen Foundation USA, the Foundation for International Community Assistance, both in Washington, and Opportunity International in Oak Brook, Ill. The trend also is drawing big commercial players: Deutsche Bank this fall spearheaded the launch of a $75 million investment fund. Microfinance investing got a boost this fall when eBay Inc. founder Pierre Omidyar and his wife, Pamela, gave $100 million to Tufts University to create a fund that invests in microfinance vehicles....

Microfinance investment funds generally don't make loans directly to needy individuals themselves. Instead the funds provide capital to microfinance institutions, which are typically small, informal banks or cooperatives that lend money for small-scale businesses, such as vending fruit, weaving shawls or operating small farms in poor countries around the world.

Overall, microfinance borrowers have proved to be good lending risks, according to Microfinance Information Exchange, known as MIX, which is funded mainly by foundations to keep track of the industry. The group says the average percentage of loan portfolios that have payments in arrears for more than 30 days has been well under 5% in recent years. Still, MIX acknowledges that data on default and repayment rates can be tough to verify. Several firms, including MicroRate Inc. in Washington and Planet Rating in Paris, rate microfinance lending institutions. MicroRate also expects to launch evaluations of microfinance investment funds later this year.There are other risks, too, including the possibility of currency devaluations in politically unstable countries. Many of the new funds raise capital through private placements, which means they are more lightly regulated than, say, mutual funds, and many can tie up your money for between five and 10 years. Also, because many of the funds are new, there isn't much of an earnings track record. Due to the risks, many microfinance investments are geared toward sophisticated and wealthy investors...

A few opportunities in microfinance investing also exist for smaller investors. Calvert Foundation offers Community Investment Notes, which require a minimum $1,000 investment, and can be earmarked to invest in developing countries or other initiatives, including post-Katrina recovery on the Gulf Coast. Investors can choose among notes with terms of one to three years, which yield as much as 2%, while notes that last for five, seven or 10 years return up to 3%. Other microfinance offerings with relatively small minimum investments are offered by nonprofits Oikocredit USA and Accion.

Smaller investors can also make loans of as little as $25 to specific individual entrepreneurs through a service launched last fall by Kiva, a Palo Alto, Calif., nonprofit organization, whose first loans have gone to individuals in Uganda. The loans are administered by local microfinance institutions. Individual lenders can expect to receive their principal back, but no interest income, within six to 12 months.

The average micro-loan size is about $345 and about 80% of borrowers are women, according to MIX. The loans generally come due within three to nine months and can carry high interest rates and fees, typically ranging from about 24% to 45% annually, MIX says. Industry officials say that is because it is expensive to administer such small loans, and the rates are still much lower than what local moneylenders charge. A rising number of microfinance institutions, which number in the thousands world-wide, are expanding beyond business loans, by offering savings accounts and insurance, products sorely lacking in many impoverished areas.