Can Greed Save Africa?

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The set-up helps Blue manage its risks: Bad loans are only in the 3%-to-4% range, remarkably low in a part of the world where fewer than one in five people has a bank account.

Unlike its peers, however, Blue has turned a relatively small Wall Street investment into rocket fuel. Early last year it secured $15 million from insurance giant American International Group (AIG). The deal gave AIG a 23% stake in Blue and two board seats—and gave Blue the imprimatur of a Wall Street titan. Blue expanded its operation from three nations to nine in a year. That burst set the stage for Blue's IPO last October—fresh capital that has spurred even faster growth.

Blue has also turned its equity into a critical component of its lending process. It uses the cachet of its AIG stake and surging stock price to coax cheap capital from development banks like International Finance Corp. and the Netherlands Development Finance Co. "Our equity investors give us leverage," says David van Niekerk, Blue's 34-year-old founder and CEO. "All of a sudden, knocking on doors has become a hell of a lot easier. You have to play that trump card." Blue keeps its cost of capital low—around 14.5%—and loans money in the 20% to 30% per year range, a fraction of local interest rates. Brisk demand for loans has sent its revenues jumping 140% this year as earnings per share have soared 400%.

On a chilly October morning, van Niekerk, tanned and dressed in a crisp peach-colored oxford shirt, looks more like a playboy than a financier. He's aboard the company's swank eight-seat jet for a trip to branches in Botswana and Zambia. The plane lands in Gaborone, a global diamond hub near the Kalahari Desert that's plastered with ads from local loan sharks. Thebo, an electrician, waits outside Blue's branch practicing his lines. He's in the market for a home-improvement loan, in a race against the soaring cost of cement. "I need this," he says. "I can't afford to stop buying petrol and food just to work on my house." Behind him is an ad for funeral insurance. Botswana is full of reminders of mortality; AIDS afflicts up to a third of its adult population. Van Niekerk goes into the back office to check on a row of salary-verification agents who typically approve applicants within an hour.

By lunchtime, the jet is off to Livingstone, Zambia, a tourist hub near the breathtaking Victoria Falls. In town, branch manager Calculus Siachono reports that Blue's business is brisk. He notes with pride that a local man is making a fortune building and selling oxcarts and is on his fourth loan.

Some complain that Blue's salary-based lending does nothing to help unemployed or informal workers. Critics also argue that Blue takes advantage of its borrowers by, essentially, mortgaging their future labor. "It's indentured servitude," says Wagane Diouf, a native Senegalese who runs AfriCap Investment, a private equity firm that invests in microfinance companies that don't use paycheck deduction. Van Niekerk counters that Blue has no recourse if a borrower loses his job, and that Blue's development-bank financing stipulates that its lending can't be abusive. "Why would we jeopardize that?" he asks. One financier says salary microlending is hastening economic evolution. "Pioneers in African banking collect high fees. But others will come in to compete, and eventually the banks will buy them all out—and everyone's borrowing costs fall."

That result won't come to pass, of course, if Africa's inexperienced borrowers turn out to be worse credit risks than microlenders anticipate. But the case of Mercy Mubanga, a 52-year-old grandmother, widow, and breadwinner for a family of eight, offers hope. She earns $185 a month as a police department secretary in the township of Maramba, in southern Zambia. Thanks to three loans from Blue—at progressively lower interest rates—she has tripled her income by moonlighting as a backyard poultry farmer, raising chickens to sell in the village market. After paying for a tin roof and hiring two men to expand her coop, Mubanga now seeks another loan to double her flock, school her two grandchildren, and perhaps build an extension on her tiny house. "We really must have more space," she says, rocking her 2-year-old granddaughter.

New York investment bank Nova Capital Partners helped make Mubanga's transformation possible. The seven-year-old boutique has found a profitable niche lining up financing for African companies. In early 2006, Blue hired Nova to find a Wall Street backer. Nova, aware that AIG's money managers were looking to expand its Africa portfolio, made the case for Blue—and scored the investment. That cash, in turn, made possible Mubanga's loans and many others. But Nova's bankers are unsentimental. "We're driven by what our investors want—returns," says Nova Senior Partner David S. Levin, ripping into a crab cake at New York's Palm West restaurant. "There's only so much time to do this before everyone else gets in."

Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.