Quotes of the Day

"Lending money to the world's poorest people? With no collateral? You must be out of your mind." That was the typical response Deutsche Bank's Asad Mahmood says he used to get when he tried to sell Wall Street on the concept of expanding microcredit in developing countries as a viable investment rather than charity work. But throw in a projected risk-adjusted return of 14%, and suddenly the Sheratons, ADPs and CalPERS of the world are more willing to consider what has long been the province of venture philanthropists and NGOs. As director of Deutsche Bank's Community Development Group, Mahmood is also using a generous safety net to attract skeptical investors. With a so-called first-loss cushion of 50%, his soon-to-be-launched $50 million debt fund could lose $25 million before commercial investors lose a dime. By employing what he calls a belt-and-suspenders approach, Mahmood says, "we're making it difficult to say no to these opportunities."

Having been shown the money, Wall Street is starting to embrace on-the-ground economic development in the form of microfinance. Over the past three decades, the practice of lending as little as $50 to poor, self-employed individuals, the vast majority of them women, has proved its sustainability through near perfect repayment rates. Plus, the short-term loans turn over several times a year, lifting tortilla makers in Mexico and basket weavers in Benin out of poverty along the way. With 3 billion people living on less than $2 a day, there's a huge market for this kind of seed capital. And although microfinance institutions (MFIs) tripled the number of borrowers to 27 million from 1997 to 2001, they are still reaching only a tenth of their target audience — hence the need to scale up by tapping into capital markets, which is no easy feat.

In New York City last month, a nonprofit group called Women's World Banking organized a three-day conference at Goldman Sachs that the hosts dubbed "Wall Street Meets the World of Microfinance." As a subset of socially responsible investing, microlending has a compelling "double bottom line": make a profit and alleviate global poverty. Pension funds, university endowments and large corporations have been sniffing around for opportunities, but all — understandably — want to see good track records first. That's starting to happen. Moody's, Fitch, and Standard & Poor's have begun either to rate microfinance transactions like bond issuances or to rate the institutions themselves. A Fitch report even detailed how MFIs in Bolivia fared better than commercial banks in the aftermath of that country's recent financial crisis. Meanwhile, Unitus, a new source of venture capital for MFIs run by a former Microsoft executive, touts the fact that it joins the board of the firms it invests in, while Cyrano Management, a Peruvian microcredit-fund manager, boasts of monthly checkups on MFIs.

Deutsche Bank is recruiting corporate investors for its pioneering for-profit microcredit venture by pointing to its successful four-year trial run with a private donor-backed fund. Both funds seek to lend credibility — in the form of hard-currency collateral — so that MFIs can establish relationships with local banks and get better loan rates. Likewise, Citigroup has used its branches in places like Kenya to make local-currency loans to MFIs, with the hope that conservative local banks will follow suit.

Until emerging markets develop the confidence (and liquidity) to lend local currency to MFIs, First World financial institutions will have to bridge the gap. In the U.S. there are retail products to help do that with an investment as small as $1,000. Both Oikocredit USA and Calvert Community Investment Notes offer 2% returns for a 12-month term, which, incidentally, beats the average one-year CD's 1.6%. Given the perpetual recycling of microfinance money to make more jobs and better lives, even hardened Wall Street types could start to feel warm and fuzzy — and, oh yeah, to make a buck too.

• Julie Rawe