NEW YORK, Nov 14 (Reuters) - Is there money to be made by giving tiny loans to very poor entrepreneurs?

Yes, say a small group of investors who gathered in New York this week for a conference about microcredit, the practice of giving small loans to entrepreneurs, usually in developing countries, who are too poor to get conventional bank loans.

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"If microcredit can be scaled internationally, there's a fantastic potential return at low risk," said David Satterthwaite, chief executive of Boston-based Prisma MicroFinance, one of the first for-profit ventures in the field.

Microcredit has generated interest since 1976, when Dr. Muhammud Yunus created Grameen Bank, the first microcredit institution, in Bangladesh.

Grameen proved that poor entrepreneurs could be great credit risks; the bank, which lends about $15 million every month, has a repayment rate of around 95 percent. Most of its loans are under $100 and go to women, to start projects like food vending or machine repair businesses. Most loan terms are under a year, sometimes just a few weeks or days.

Almost all of the microfinancing in the world -- by some estimates there are currently $7 billion in loans outstanding -- has so far come from government agencies and charitable institutions.

Satterthwaite and others are working to change that by proving that the private sector can alleviate poverty through microcredit while earning a decent return.

Interest rates on microcredit loans can work out as high as 20 percent to 60 percent on an annual basis, he said. That may sound high, but the only alternative for these borrowers is money lenders who charge anywhere from 300 percent to 3,000 percent interest.

"The potential for economic returns is outstanding," said Satterthwaite, citing three reasons: high interest rates charged, high repayment rates, and short loan terms, which mean capital can be turned over several times a year.

"There's no reason microfinance can't provide a 10 percent annual return," he said. Prisma has so far raised about $1.3 million from private investors, but is still posting losses as it develops its subsidiaries in developing countries.

Before the business can really take off, microfinance institutions (MFIs) have to build their capacity to handle a much higher number of transactions. Most institutions serve fewer than 2,500 borrowers at any one time.

Groups like Unitus, a nonprofit fund started by a Microsoft retiree, are moving toward that goal. For a recent project in Mexico, Unitus invested $1.5 million in loan capital and $375,000 in capacity-building grants.

So far, investors have been reluctant to take microcredit seriously as a money-making strategy, in part because the investments are exposed to political volatility and foreign exchange fluctuation, proponents acknowledge.

CREATING INVESTMENT TOOLS

But they say investors can protect against those risks by focusing on countries with relatively stable currencies and governments. Bolivia and Bangladesh have long been favorite destinations for microcredit money.

The Calvert Group, which runs a family of socially responsible mutual funds, is another pioneer in bringing an investment perspective to the world of microfinance.

In 1995, Calvert's nonprofit arm introduced a product called Community Investment notes. These investments -- basically bundles of microloans sliced into securities -- are now available from broker-dealers and financial planners. Calvert allows investors to choose a return rate of zero percent to 3 percent -- the lower the rate, the more money goes back into the microcredit projects that Calvert supports.

That return may have seemed paltry during the boom years of the 1990s, but "a return of 3 percent these days is not too bad," said Shari Berenbach, executive director of the Calvert Foundation, which administers the notes. The microloan portfolio has never lost even a dollar of investors' money, she said.

Only a few corporate partners have stepped up to the plate. Berenbach cited Starbucks Corp. (NasdaqNM:SBUX - News) and Unilever Plc's (London:ULVR.L - News) Ben & Jerry's Ice Cream, two stalwarts of socially responsible business, as early investors.

Satterthwaite calls microfinance's social goals "a competitive advantage," since every person who emerges from poverty becomes a more active consumer, fueling demand for products and services.

He added that microfinance is insulated from macroeconomic downturns, citing new research that shows MFIs increased their loan volumes during the Asian financial crisis of 1997 without any corresponding increase in delinquencies.

As such, he said, microfinance can diversify an individual's or corporation's investments, providing a small hedge against broader economic storms.

"This fits into the pie of someone's portfolio," he said.

So what will success look like? "We will have arrived when we partner with (retail investment broker) Charles Schwab, and investor clients can check off microfinance for their portfolios," he said.