Change Lives With Microfinance
Posted by Jim | April 25, 2009 | Comments Off
Image via CrunchBase
The only way to end global poverty is to ensure that people have the opportunities to help themselves. Aid to emerging countries on a governmental level may do more harm than good, as Dambisa Moyo described in a recent article for the Wall Street Journal. Large banks may not see enough profit potential to bother with small projects. Popular charities may be too overburdened with administrative costs to make a difference on an individual level. Recently, microfinance institutions have emerged to help fill this void. These organizations provide the poor and near-poor with access to loans, savings or other financial services, often to start or run agricultural or other small business ventures. Access to even small levels of financing can make a tremendous difference to individuals, their families and local communities.
How can you get involved? Kiva is a non-profit organization that matches donors with individual or collective entrepreneurs from around the world, through partner lending institutions located in-country. These partner institutions screen applicants and charge prevailing interest rates on the loans. Each entrepreneur has a profile page on Kiva’s web site, where you can learn how much money they need, what they plan to do with it and the terms of the loan. The profile page also includes information on the partner institution originating the loan, such as their delinquency rate and how much money they’ve raised through Kiva. The entrepreneur profiles are searchable by a number of categories, including industry, geographic location and gender, allowing donors to select individuals in which they have a genuine interest.
Donations can be made for as little as $25, payable by credit card or PayPal. Loan principal is repaid according to the terms of each loan. It is important to remember that the donor (you) does not earn any interest on the loan, and there is no guarantee that the principal will be repaid. According to Kiva’s web site, out of over $31 million in completed loans, the default rate was less than 2%. Throughout the life of the loan, both the recipient and the partner institution can post status updates on the Kiva web site, allowing donors to follow along and get a sense of how the business is doing. When a principal payment is received, you can choose to lend the money to a different project, make a tax-deductible donation to Kiva or transfer the funds back to your PayPal account.
I recently made my first donation through Kiva to the mother of four in Peru, who borrowed $275 over six months to purchase supplies for her bakery. I’ll pass on any updates to her progress that I receive.
For those looking to earn a return on their investment, one option is MicroPlace, a for-profit company owned by EBay. Similar to Kiva, you can screen entrepreneurs by geographic region, duration of loan or social cause. Additionally, you can screen by the amount of return you expect to receive. I have not yet invested using MicroPlace, but a couple of things to keep in mind: first, the higher the rate of return, the riskier the loan. Second, MicroPlace is a registered broker-dealer, and accounts opened are investment accounts. Any interest received is income, so consider any tax consequences. Investments can be made with as little as $20, funded by PayPal or a bank account.
Have you had any experiences with Kiva or MicroPlace (or another microfinance company)?
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