In 1974, an economics lecturer at the University of Chittagong, Bangladesh, lent $27 to a group of impoverished villagers. Thirty years later, the lecturer, Muhammad Yunus, won the Nobel peace prize and microfinance become the world's favourite development idea, the silver bullet that will cure world poverty and spread the wealth-creating force of capitalism across the globe. Only last month, Gordon Brown announced more money to help support microfinance institutions (MFIs) in Africa.

MicrofinanceMicrofinance has a beguiling simplicity and a record of success not just in promoting financial resilience but in achieving other social objectives – reaching the excluded, empowering women and developing the capacity of small groups of people to take control of their own lives.

Muhammud Yunus founded his Grameen Bank in 1983 to make very small loans – perhaps £15 a time – to the poor and uncreditworthy. Since then it has loaned about £3 billion to more than six million of the very poorest in Bangladesh and across the Asian sub-continent, yet it remains entirely self-financing. Borrowers' deposits cover the costs.

Private-sector investors increasingly appreciate microfinance investments for their dual nature: First, they allow investors to adopt a social investment strategy geared toward poverty alleviation and social development in developing countries. Second, they simultaneously offer an attractive risk-return profile that is marked by largely stable financial returns, low credit default rates and low correlation to the mainstream financial assets as well as the general domestic economy. Some evidence even indicates that microfinance investments might be conducive to the efficient portfolio diversification.

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