Silly Idea of the Day: A Micro-Finance CDO

Is there something very weird about this?

Citigroup has announced a new $165M CDO backed by 30 micro-finance loans to entrepreneurs in 13 countries including Bosnia, Tajikistan, Mexico and El Salvador.

What does the “micro” mean in “micro-finance”? Less than $100? Less than $1,000? Less than $10,000? I only ask, because the average size of these microloans would seem to be $5.5 million. Somehow I doubt that a “struggling Tajik bicycle repairman” is the kind of person who would take out a $5.5 million loan.

Now it’s entirely possible that what Citibank is talking about here is not actually “30 micro-finance loans to entrepreneurs” but rather 30 loans to micro-finance institutions which in turn lend the money on to entrepeneurs. If that’s the case, I agree with Trade Radar Operator when he says that “it is hard to understand why Citi feels the need to create this kind of CDO at this time”.

After all, if that’s what’s happening, then essentially the entrepeneurs are borrowing money from the micro-finance institutions which are borrowing money from Citigroup which is borrowing money from CDO investors – a ridiculously long and complicated chain underpinning what’s meant to be a close relationship between lender and borrower.

If you fancy getting involved in micro-finance, then, there are many ways of doing so, but I’d give this CDO a pass, and hope that the idea doesn’t catch on.

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