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“Do-It-Yourself Foreign Aid,” says the New York Times. Get acquainted with microfinance on this week’s Just Cause.
Florence A. is a 41 year old mother of 5, with a business in Benin City, Nigeria. With the help of 21 individuals from Europe, Canada and the U.S., she has purchased food, provisions and drinks to sell at her store. Three months after receiving her $525 microfinance loan, Florence had repaid 38% of what she borrowed.
The Basics:
Microfinance is the process of making small loans to individuals or groups so they can expand or establish small businesses. Loans are paid back in small amounts, over a short period of time, usually between 6 months to a year. The money is then “reloaned” to another borrower.
Microfinance is often done by large microfinancing institutions (MFI’s) which provide a variety of banking services to the poor.
But you don’t need an MFI to get involved in Microfinance. Individuals can also loan small amounts through peer to peer lending groups (P2P’s). Recently, New York Times Reporter, Nicholas Kristof, drew attention to a P2P called Kiva and encouraged his readers to participate in what he referred to as “do-it-yourself Foreign Aid.” 1 It was through a $25 loan at Kiva that B-theChange first learned about Florence in Nigeria.
Microfinance has been around since the 70’s, but has become increasingly popular since the Grameen Bank won the 2006 Nobel Peace Prize, 2
Muhammad Yunus, founder of the Grameen Bank, describes microfinance as a “poverty-focused, collateral-free, low-interest microcredit program.” 3
Pros:
Conventional banks loan money to the wealthy. The wealthier you are, the larger the loan you can receive. It takes money to make money and people can easily get trapped at the bottom. In microfinance the loan process is not based on wealth. “It is based on the potential of a person.” 4
Microfinance has proved to be just the kind of jump start many families need to catapult themselves out of poverty and into the ‘working class.’ When microloan receivers get a loan, they don’t just benefit from the loan itself. They also benefit from the positive credit history they can build.
But microfinance isn’t just about alleviating poverty. It is also especially beneficial in the battle for women’s equality. A majority of microfinance loans go to poor women, many of whom are culturally cut off from traditional financial institutions. With these small loans they can become productive and powerful within their communities. 5
Microfinance can also be good for the lender. Traditionally MFI’s charge interest on their loans. Some P2P’s also charge interest. If you invest with MicroPlace for example, you can choose the length of the investment and the financial return on the loan, so you can actually earn a small amount of money even while making loans to those in need.
Cons:
There are some arguments against microlending. One argument is that it helps the poor but not the poorest. The poorest in the world may not have the access or literacy needed to get involved in microlending and, when loans do reach the extremely poor, the money may be used for immediate needs, not invested. Critics suggest that other interventions, such as free health care and business training, are more helpful to the extremely poor.
Another argument is that credit is a serious responsibility. Sometimes clients are unable to repay their debts and may end up in a worse financial state than when they started.
Others claim that many organizations are ‘jumping into this field,’ under the assumption they can alleviate poverty, without looking at the causes of poverty in different regions.” 6
Finally, critics argue that heavy investment in microfinancing hurts local economies. Microfincance assists a few but not the larger population. These critics suggest that rather then loaning money to several small groups or individuals, funds should be used to help a community, through financing a larger project. An example of this would be loaning money to a sewing cooperative, rather than to an individual entrepreneur tailor or seamstress.
The Bottom Line:
Our consensus is that microfinance, despite its detractors, is a constructive way to invest your money. That said, we find that microlending has the greatest positive effect when the loans go to projects that provide immediate returns, and loans can be repaid within a short period of time.
The key to responsible lending seems to be finding an MFI or P2P that is trustworthy, and does a good job of screening potential candidates. You can get more information on international microlending at MicroFinance Gateway
Take Action:
B-theChange thinks a small P2P loan is a great place to start your microlending adventure. Given the low minimum investment, the variety of available loan takers, and the transparency it provides, we think KIVA is one of the best sites for the casual microlender.
So next time you take a bunch of change to the bank or find some money in an old jacket, consider loaning $25 to a poor person in need, through a P2P or take the plunge right now, set up your KIVA account and start scoping out different loan applicants.
If you’re not quite ready to part with your $25 you can educate yourself even more about microfinance. The United Nations Capital Development Fund has a free online course. Check it out here.
Written by guest author: Katherine Mullaney
“Do-It-Yourself Foreign Aid,” says the New York Times. Get acquainted with microfinance on this week’s Just Cause.
Florence A. is a 41 year old mother of 5, with a business in Benin City, Nigeria. With the help of 21 individuals from Europe, Canada and the U.S., she has purchased food, provisions and drinks to sell at her store. Three months after receiving her $525 microfinance loan, Florence had repaid 38% of what she borrowed.
The Basics:
Microfinance is the process of making small loans to individuals or groups so they can expand or establish small businesses. Loans are paid back in small amounts, over a short period of time, usually between 6 months to a year. The money is then “reloaned” to another borrower.
Microfinance is often done by large microfinancing institutions (MFI’s) which provide a variety of banking services to the poor.
But you don’t need an MFI to get involved in Microfinance. Individuals can also loan small amounts through peer to peer lending groups (P2P’s). Recently, New York Times Reporter, Nicholas Kristof, drew attention to a P2P called Kiva and encouraged his readers to participate in what he referred to as “do-it-yourself Foreign Aid.” 1 It was through a $25 loan at Kiva that B-theChange first learned about Florence in Nigeria.
Microfinance has been around since the 70’s, but has become increasingly popular since the Grameen Bank won the 2006 Nobel Peace Prize, 2
Muhammad Yunus, founder of the Grameen Bank, describes microfinance as a “poverty-focused, collateral-free, low-interest microcredit program.” 3
Pros:
Conventional banks loan money to the wealthy. The wealthier you are, the larger the loan you can receive. It takes money to make money and people can easily get trapped at the bottom. In microfinance the loan process is not based on wealth. “It is based on the potential of a person.” 4
Microfinance has proved to be just the kind of jump start many families need to catapult themselves out of poverty and into the ‘working class.’ When microloan receivers get a loan, they don’t just benefit from the loan itself. They also benefit from the positive credit history they can build.
But microfinance isn’t just about alleviating poverty. It is also especially beneficial in the battle for women’s equality. A majority of microfinance loans go to poor women, many of whom are culturally cut off from traditional financial institutions. With these small loans they can become productive and powerful within their communities. 5
Microfinance can also be good for the lender. Traditionally MFI’s charge interest on their loans. Some P2P’s also charge interest. If you invest with MicroPlace for example, you can choose the length of the investment and the financial return on the loan, so you can actually earn a small amount of money even while making loans to those in need.
Cons:
There are some arguments against microlending. One argument is that it helps the poor but not the poorest. The poorest in the world may not have the access or literacy needed to get involved in microlending and, when loans do reach the extremely poor, the money may be used for immediate needs, not invested. Critics suggest that other interventions, such as free health care and business training, are more helpful to the extremely poor.
Another argument is that credit is a serious responsibility. Sometimes clients are unable to repay their debts and may end up in a worse financial state than when they started.
Others claim that many organizations are ‘jumping into this field,’ under the assumption they can alleviate poverty, without looking at the causes of poverty in different regions.” 6
Finally, critics argue that heavy investment in microfinancing hurts local economies. Microfincance assists a few but not the larger population. These critics suggest that rather then loaning money to several small groups or individuals, funds should be used to help a community, through financing a larger project. An example of this would be loaning money to a sewing cooperative, rather than to an individual entrepreneur tailor or seamstress.
The Bottom Line:
Our consensus is that microfinance, despite its detractors, is a constructive way to invest your money. That said, we find that microlending has the greatest positive effect when the loans go to projects that provide immediate returns, and loans can be repaid within a short period of time.
The key to responsible lending seems to be finding an MFI or P2P that is trustworthy, and does a good job of screening potential candidates. You can get more information on international microlending at MicroFinance Gateway
Take Action:
B-theChange thinks a small P2P loan is a great place to start your microlending adventure. Given the low minimum investment, the variety of available loan takers, and the transparency it provides, we think KIVA is one of the best sites for the casual microlender.
So next time you take a bunch of change to the bank or find some money in an old jacket, consider loaning $25 to a poor person in need, through a P2P or take the plunge right now, set up your KIVA account and start scoping out different loan applicants.
If you’re not quite ready to part with your $25 you can educate yourself even more about microfinance. The United Nations Capital Development Fund has a free online course. Check it out here.
Written by guest author: Katherine Mullaney
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