Microfinance as Ethical Investments?

Abstract

Responsible investments, SRI, have double or triple bottom-lines. The investor wants financial and some ethical return. Microfinance is offering credit to the poor without collateral security aiming at poverty-reduction and is commonly given to women. This research overview of recent studies of microfinance in India investigates the effects, problems and opportunities of microfinance as a social responsible investment. The overview revealed that, overall, the aims of microfinance are being met, particularly the empowerment of women. The reduction of poverty is also fairly successful, with signs, although uncertain, of long-term effects. Microfinance is also a tool for financial inclusion of the underprivileged. The self-help group (SHG) model, working as social collateral security, is efficient in peer monitoring and main cause for repayment rates over 90 %. The SHGs also have a social role. Problems found were over-indebtedness partly due to unregulated market and in certain cases high interest rates. The conclusion is that responsible investors have mainly two choices in microfinance: the socially directed investment, subsidizing interest rates; and the commercial direction with market based rates. Both ways have ethical risks that the investor must manage. The study also concludes that financial markets can learn from the SHG model of microfinance.

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