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.

Investors can choose among a variety of new investment vehicles, including equity and debt investment funds; bond-like securities that are ultimately backed by thousands of tiny loans and so-called loan-guarantee funds where, in some cases, participants lend their creditworthiness rather than cash. Unlike charitable donations, microfinance investments don't bring an upfront tax break.

Many of the new investment instruments have been launched by nonprofit organizations long involved in the industry, including Grameen Foundation USA.

[Excerpted from an article by Rachel Emma Silverman, The Wall Street Journal]