How do you feel about "microfinancing"?

[Tierra_y_Libertad]

Muhammad Yunus won the 2006 Nobel Peace Prize for his efforts to help poor women in Bangladesh, and elsewhere, by giving them loans to set up small, very small, businesses.

NPR recently had a segment about microfinancing through an organization called "Kiva", in which individuals could make loans to other individuals in the 3rd world in small amounts.

My wife and I started making loans last month, and I'm now looking at prospective borrowers on Kiva's website for our next $25 loan.

Take a look, if you're interested in helping someone directly.

http://kiva.org/app.php?gclid=CMCuzp35qYkCFSdIYQodPCBCOQ

[northzax]

1. does it pay interest?

or are they zero-interest loans? (I can't figure out from the website)

[SoCalDem]

2. On a very small amount, interest would not be much anyway. It's a charitable idea

not a money-making scheme :)

[northzax]

3. couple of years

on a thousand dollars? yeah that's money. and if there is no interest, why not just make them grants, instead of loans? because someone is making interest on the money, who?

[Xithras]

17. Grants vs. loans

While grants would be nice, you have to keep in mind that this is driven by donations so funding is limited. If the money is a grant, it's GONE once it's given away. If the money is a loan, the money will eventually be freed up to help someone else.

[hfojvt]

13. It could be

say the borrower pays $100 a month for 18 months on a $1000 loan. They would repay $1800. Or they could be paying $60 a month and end up repaying $1080. Enquiring minds want to know, because I do not want to help fund a loan shark even with $25.

[SoCalDem]

24. The types of loans that Yunus makes are for a SMALL amount

like $100 or $200 usually. The applicants are usually women, who PAY IT BACK ASAP.. He is an amazing guy.. If there is interest, I'm pretty sure it's a very small amount:)

[Tierra_y_Libertad]

4. Try this for explanations.

http://kiva.org/app.php?page=about&action=microfinance

[northzax]

12. that doesn't answer my question

I understand the concept of microfinance (I've worked on a few projects myself) but in this particular case, who gets the interest?

[133724]

32. You do....

http://www.grameen-info.org/bank/GBGlance.htm

A bank earns money by making loans and by paying interest to depositors...

All you need to do is deposit some money in the bank.

And with Turdblossom in charge of the economy it might be a good thing to invest overseas.....

[northzax]

37. well, no.

in this case you do not. my question, fairly enough I think, was basically that, since the borrower is paying interest, who gets it? if it's not the lender (me, in this case) who? Kiva.org? the local bank? the local loanshark? it's a real question about financial transparency.

[Warpy]

6. Usually the interest is nominal

and just enough to keep the lender going. Microloans are a great alternative to going to predatory lenders, which exist in the third world, too.

The repayment rate varies from 90-96%.

[baldguy]

9. Predatory lenders exist all over the place.

[northzax]

11. 16% is nominal?

come on, microfinance loans have high interest rates. What I want to know is, in this particular case, if I loan someone $1,000 through this program, and they pay 16% interest over two years, who's getting the interest?

[hfojvt]

14. where did you get 16%?

I don't think that's nominal, but it beats a payday loan at 700% or more.

[northzax]

16. from their website

the average interest rate on a $500 loan.

[Xithras]

20. That's explained in their FAQ.

Kiva is a multi-level institution. Kiva is the top level, and then there are local lenders below them. The interest rates all go to the local lenders (in the impoverished areas) to keep them operating. While the thought of supporting lenders may irk some people, keep two things in mind:

1. Those lenders are local to the impoverished areas, so that interest is directly supporting the local economy in the areas the lenders work in. That's good for everyone in the region.

2. The interest covers the expenses and operating costs of the lenders, allowing 100% of the lended "donations" to go to the poor people the program is trying to help.

While 16% may seem a little high to you or I, keep in mind that a local African lender only charging 1 or 2% interest on a $500 loan would quickly go broke and need loans himself. The extremely high repayment rate indicates that it isn't that much of a burden on them anyway.

[Warpy]

23. It's one hell of a lot better than the usual lenders

who take on high risk loans to poor people. Around here, their loans run in excess of 300% per year.

[Gormy Cuss]

18. It appears that the loan is repaid without interest.

The interest charged to the recipients is used primarily to cover the transaction costs (application reviews, ongoing repayments, et cetera)and the cost of defaults. The individual who loans $25 expects to be rewarded by the feeling of helping out rather than through a monetary gain.
I may be wrong, but that's the way it looks to me.

Why are microcredit interest rates so high?

The nature of microcredit – small loans – is such that interest rates need to be high to return the cost of the loan.

"There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.

The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can't be cut below certain minimums."

[Glimmer of Hope]

5. I love this idea. Thanks for posting the Kiva link.

[porphyrian]

7. That sounds kind of cool. - n/t

[Momgonepostal]

8. I saw a documentary about microfinancing a couple of years ago.

It was amazing to me how what seems like such a small amount of money to us can change a family's life.

In addition it saying the re-payment rate is sky high, they noted also that is is much higher for women.

[DixieBlue]

10. I think it's a wonderful idea ...

and Yunus certainly deserved the prize.

[Momgonepostal]

15. here are a couple of video segments, clips from documentaries...

that talk about these micro-loans.

http://www.kbyutv.org/smallfortunes/?vid=1

and you'll have to scroll down a tad for this one...

http://financeprofessorblog.blogspot.com/2006_07_01_financeprofessorblog_archive.html

[jannyk]

19. I have been a KIVA lender for several months

and currently have 14 members in my KIVA family that I have lent to. All are women (my choice) and come from Kenya, Tanzania, Ecuador,Togo and Mexico.

All are paying back as promised and when they have, I shall relend the money to others.
I now lend to one a month - usually $25 (sometimes more) - I figure I spend much more than that a month at Starbucks. It's money I don't miss and it is really changing peoples lives, and the lives of their children for the better.

No, there is no interest paid, but this isn't about 'investing' for me. It's about helping people help themselves and move themselves above abject poverty. I highly recommend checking out the Kiva site - it's something you can really feel good about doing and, unlike other 'charities', you know exactly where your money is going and what good it is doing.

[Tierra_y_Libertad]

21. We have 6 "family" members now. Adding a 7th today.

2 men, 4 women. Kenya, 2 from Uganda, Azerbaijan, Mexico, and Bulgaria.

And, we feel the same way you do about our "investments".

[jannyk]

26. Do you look at your fellow lenders?

I do. It amazes me at how diverse and global Kiva really is already.

I have one Kenyan lady that needed $1000 to fund a village 'clinic'. It takes a fair few bodies to fund $1000 at $25-$50 a pop and my fellow lenders include people from all over the US & Canada, Germany, England, Switzerland, Sweden, China and Singapore - I find it amazing.

We bought our daughter a $25 Kiva Donor gift certificate and she's also now donating monthly. It's a really great way to turn people on to how it all works and I think once they get started (with that little 'push') they will expand their 'family' - how could they not?

Congratulations on your 7th! I got somewhat 'greedy' the first time I logged in and lent to a whole bunch. My husband then pointed out that us going broke in the process was probably counterproductive, so I now pace myself to one (or two) a month.

I know how you feel and it's a really good feeling isn't it?

[Tierra_y_Libertad]

27. Yes, indeed. It's inspiring how "ordinary" people can help directly.

And, how generous they can be.

Like you, we had to put the brakes on, and now each of us select one person a month to fund.

Having been desperately, hungry, poor, as a kid, and having traveled to some 3rd world countries as an adult, I appreciate how a little can go a long way to those truly in need.

[burythehatchet]

22. The sunny side of globalization

when people can connect on a family to family basis, the positive results are immeasureable.

Good work!

[sinkingfeeling]

25. I've been a donor to FINCA International's 'village banking' for several years.

[Geoff R. Casavant]

28. Also look at Prosper.com

I'll be setting up a lending account myself in a short while.

The borrowers pay a lower rate than they could get at a bank, and the lenders get a higher rate than they could from a savings account or CD.

[angstlessk]

29. Damn, I forgot I just emptied my paypal account..have to wait till the new funds are posted

Wish I knew about this at Christmas, I did Oxfam, but this is so much more exciting, to see the people and know where the money is going and then for it to be PAID back in order for one to loan to another it is like a never ending pool of money to be spread around the world! What a great IDEA!

[Tierra_y_Libertad]

30. We also contribute to Oxfam - good outfit.

But, like you, we feel that micro-financing is a great idea.

[Tierra_y_Libertad]

31. Kick for the night shift.

[Flying Dream Blues]

33. kick and recommended. This is a great venture! ng

[bonito]

34. This sounds like I can make a difference.

[girl gone mad]

35. I gave everyone Kiva gift certificates for Christmas last year.

Not one person has redeemed one yet, though. :shrug:

Personally, I like reading the stories and looking at the pictures. I've got a lot of loans out there.

[Jcrowley]

36. Women's empowerment or debt trap?

Women’s empowerment, or a debt trap?

By Laxmi Murthy

 Micro lending does create a space for women. But it does not change macro structures or provide a transformative framework, says a women’s group called Nirantar
 
Micro-credit has been promoted as a tool not only of women’s economic empowerment, but also of social and political empowerment. An assumption of micro-credit is that these programmes will significantly increase women’s incomes, enable women to control that income and also enable them to negotiate improvements in their status within the household. It was also assumed that micro-credit would give women access to support networks that enable them to advance their individual and collective interests at the local as well as macro level.

Yet, the concept of empowerment itself is highly contentious. Nirantar, a Delhi-based women’s resource centre working on gender and education in various parts of the country, has been looking at the education component in self-help groups, and consequently examining the notion of empowerment in these groups. Nirantar in its interaction with self-help groups (SHGs) in various parts of Uttar Pradesh, Kerala and Gujarat, found that when micro-credit becomes central, the modalities of financial transactions consume the SHGs. There is excessive focus on records and book-keeping. Health, education, and women’s personal needs become marginal to this process. Women’s secondary status and violence against women is not on the agenda, but relegated to informal exchanges after the ‘main’ meeting of the SHG. The ‘happy’ face of micro-credit is that women are a conduit for bringing credit to the family, but the ‘sad’ face is that women are burdened with loan repayment.

Another basic question that researchers at Nirantar raise is “why only ‘micro’ credit for women? Women then have to struggle to make this small loan viable, make the activity viable and ensure loan repayment. And women often are able to ensure repayment by cutting down on their own consumption, or through wage labour. There is no employment-generation, but only self-employment, and that too on a non-viable scale. We have innumerable examples of subcontracting on exploitative terms, with scant respect for labour laws. The question of whether micro-credit indeed empowers women has also been raised by researchers in other parts of the world. <‘ Experts question wisdom of micro-credit for women’ http://www.womensenews.org/article.cfm/dyn/aid/123.../>

Ironically, in most of the schemes, women’s own money is locked up, and they are forced to take a loan against their own savings at a higher interest. NGOs have become collecting agents for banks which are trying to increase their penetration of credit. But this penetration is only creating more dependence. Back-to-back lending ensures that women are continuously in debt and have to undergo the stress of repayment. It is no mere coincidence that Andhra Pradesh, oft-quoted as a ‘success story’ of micro-credit, is also the state with the highest number of deaths due to debts.

http://www.infochangeindia.org/microc_article4.jsp

You may also research Grameen's past dabbling with Monsanto. Fortunately it was nipped in the bud by Vandana Shiva and some pesky activists. Micro-credit is not what it appears to be. Please look again.