As the Omidyar-Tufts Microfinance Fund continues to invest the $100 million it received from Pierre and Pam Omidyar (A '88 and J '89) upon its inception last fall, Tufts students and faculty are investigating the emerging sphere of microfinance.
Microfinance, pioneered by Bangladesh's Grameen bank, issues tiny loans to small businesses and individuals who would do not qualify for traditional financial services.
Seniors Amanda Fencl and Jarret Szeftel are writing their senior theses on different aspects of microfinance.
Neither student's thesis directly addresses the Omidyar-Tufts Fund, the independent organization, guided by its own Board of Trustees, that holds financial responsibility for investing the donation.
But both hope the ongoing process will shed light on the Fund's potential effects.
Szeftel decided to write a thesis on microfinance after learning about the increasing attention that it is getting among banks and firms looking to invest. He is investigating "whether this increased competition...will change the industry," he said. Microfinance has "historically been poverty-targeting...but now there are banks moving in who are [more interested in] investing for a profit."
"I'm trying to really figure out what it is that they're after," he said.
He is investigating the ethics of specific investors, who could charge high interest rates, he said, claiming that start-up businesses in the third world are high risk. This practice could lead to high debt for third world entrepreneurs.
The Omidyar-Tufts Fund plans to invest in mostly low-risk businesses, said Tryfan Evans, Omidyar-Tufts Microfinance Fund Director.
"Our goal is to ensure that the risks we take are prudent, commensurate with the potential return on the fund's investments, and carefully managed," he said.
But as the Fund makes only indirect investments, Evans will put his trust in the microfinance investors based on their past track record.
Gil Crawford, the general manager of MicroVest Capital Management, a microfinance investment firm that invests in microfinance banks in the third world, told the Daily last spring that he considers most microfinance opportunities to be high risk.
Of the 8,000 microfinance banks worldwide, Crawford said that his company would only consider investing in about 250 of them, he told the Daily for a May 21 article.
On the other side of the coin, the less risk investors take, the less the potential benefit for small businesses. Fencl's thesis, entitled "Using Rural Micro-Credit in Madagascar to Promote Sustainable Development," will discuss what investors look for in businesses they consider to be ready for microfinance.
Fencl became interested in this topic after living in a small fishing community in south western Madagascar while studying abroad last year. She said that a microfinance investor there told her that the community was not ready for microfinance investment.
Banks that invest using microfinance do not have branches in many impoverished communities, Fencl said, making it difficult for those people to get a business started. "Commercial banks in the cities aren't going to go into those rural areas either," she said.
But even though microfinance did not help the poor from the fishing community she lived in, Fencl said that the same may not be true in all locales.
Microfinance is "really location- and model-specific," she said. "What's working in the community I was in is not necessarily going to work in a community across the country."
As Szeftel and Fencl move forward in their research, they are unsure about how much information they will be able to tap Evans and The Omidyar-Tufts Fund for.
"I went into it thinking it would be a huge resource - which it might be," Szeftel said. "I haven't gotten to the stage of my research where I'm talking to actual investors."
But the Tufts-Omidyar Fund may aid academic research on microfinance in another way. Tufts President Lawrence Bacow believes the donation has changed Tufts for the better because of the increased concentration investors now have on the school.
"This gift is transformative for Tufts," he said "It has attracted an enormous amount of attention among other institutional investors."
Economics Professor Margaret McMillan has also seen the benefits of the attention the fund gained for Tufts.
"As a result of the gift, the economics department has been able to find financial support for an exciting new research initiative in microfinance," she said. "Professor [Edward] Kutsoati and I have three projects currently underway in Ghana."
