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What Is a Microfinance IPO?

Jim B.
Jim B.

A microfinance IPO is an initial public offering of stock shares issued by a company devoted to lending money to poor entrepreneurs in developing countries. The IPO is the first opportunity for investors to buy the stock on a publicly traded stock exchange. Microfinance is championed by some economic experts as a way of strengthening the global economy through relatively small loans. There is some controversy attached to any microfinance IPO, since critics consider it a way for investors to benefit off the poorest members of society.

Many businesses are privately owned, but require a significant amount of funding to compete on a national or global level. In some cases, wealthy private investors may have enough money to get such businesses to the next level. Failing that, companies in need of a huge capital boost may try to go public, which means that investors everywhere will be able to buy small ownership shares via a centralized exchange. Companies who practice loans to would-be business-owners in rural areas of small countries may attempt to make this move via a microfinance IPO.

Woman holding a book
Woman holding a book

When an IPO, or initial public offering, occurs, the company involved offers shares to the public at large at a price agreed upon by the company and the underwriter, which is usually a large brokerage house sponsoring the offering. At that point, price often surge due to investors' typical interest in a new offering. After a few weeks, the price of the stock generally stabilizes to some equilibrium level that represents what traders think of the company's value.

In the case of a microfinance IPO, that value is determined by how much money the company is making on its loans. The idea behind microfinance is that just a small investment in needy entrepreneurs from areas without much commerce can reap big dividends. Microfinance proponents feel that this type of investment is a good way to stimulate the economy without much outlay of cash, and the potential for economic and societal good from the practice is limitless.

Unfortunately, those investors who are interested in a specific microfinance IPO must be wary of a few concerns. Some microfinance lenders are free with their funding to the poor but demand exorbitantly high interest payments in return, which can put a needy person in an even worse financial hole. There is also some societal unease about the prospect of wealthy investors getting even richer from the struggles of the poor. Those considering buying into a microfinance IPO should closely examine the specifics of the company and its practices before proceeding.

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