Sun Blogs: For a Few Dollars More
Financing Microfinance
October 20, 2009 - 12:00amYesterday, I made a loan to Ephraim, a man running a hotel/restaurant in Ntungamo, a small town in Uganda where I spent a few weeks last July. He’ll be using my money, along with the contributions of a number of other westerners, to offset the impact of recent high food prices on his business.
He’ll be paying us back within six months, and if for some reason he cannot do so, his loan is guaranteed by ten of his friends.
Loaning money to Ephraim was easy, thanks to an organization called Kiva. Kiva was designed with a simple mission: let everyone, not just banks, loan money to the poor. It began in October 2005, and during the past four years has connected developing-world entrepreneurs with over $95 million of short-term loans.
By connecting people like you and me in the developed world to microfinance organizations in developing countries, Kiva has been able to extend this magic of microfinance to well over a hundred thousand people. These people have been given the chance to bring themselves out of poverty, based on, I should point out, a number of the same capitalist principles we believe in so strongly in America.
In the poorer nations of the world, just like in our country, there are loads of entrepreneurs and business opportunities for people who can just get a little start-up capital. But unlike in our country, these residents can’t depend on such funding from typical banks, which lend based on credit histories and collateral. So that’s where microfinance steps in. By issuing a loan for someone to build and oven or buy a loom, they are able to increase their income stream enough to pay back the loan, and greatly increase their quality of life. And given that the money in this scenario takes the form of loans instead of donations, it means the model is sustainable, and the money can keep circulating.
When using Kiva, every time a loan is repaid, you have the choice to withdraw your investment, or lend it to another entrepreneur. For example, the money that I loaned to Ephraim was recently used by a farmer named Victoria in Peru for insecticide, who paid back her loan last week. Before that, a man in Mexico had used it to put security bars on his windows. And after Ephraim pays it back, it’ll go somewhere else in Kiva’s extensive database.
Microfinance doesn’t solve every problem in every situation, but in the right environment, it has been proven hundreds of thousands of times over to be extremely effective. So, for those looking to diversify their portfolio, maybe Kiva is the way to go. You can’t earn interest on your loans through Kiva, but given the economic roller coaster of the past two years, a 0% return on your investment really isn’t too bad.
And if that’s not incentive enough, one final feature of Kiva is the lending teams, which function pretty much like a Facebook group. Cornell has one, of course, and the members have collectively loaned $2,675. That’s great, but Harvard’s group has loaned nearly three times as much as ours. Can’t have that now, can we?
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