Micro Lending: Socially Responsible Investing

Micro-Lending History
Kiva is a program which allows lenders normal people to donate to people through something known as micro lending. The basic idea is to loan people who are struggling to get by money for capital and working capital (operating costs). It is considered "micro" because the loans are typically under $1000 and can be as low as $100. For many in the world who earn less than $1/day this is significant amount and can be enough to start their own business. The founder of the Grameen Fund Muhammed Yunnus recently won the Nobel Peace Prize for his work in microcredit. You can find more information about micro finance credit on Wikipedia: Microcredit

How does Kiva work??
Kiva acts as a portal and lets lenders donate to the organization which is funding the people requesting the loans. According to the Kiva website here are the steps that are taken:

1. Lenders pick a business and make a loan using their credit card
2. Kiva transfers funds to local partners. Partner disburses loans to each business
3. Over time, partner collects repayments and provides business updates at kiva.org
4. Funds are returned to lender. Kiva lender may withdraw or re-loan.

Kiva FAQ

Micro Place:
As I was doing research on Kiva and other Microfinance sites, I found one called Micro Place which offers people the opportunity to invest in a security which would then make this money available to the organizations that lend money out. You can essentially buy a bond that is backed by a company which has varying maturities (1-4 years) along with interest rates from 1-3%. Micro Place would be only an option only for those people who didn't have any problems with making money off loans made to poor people.

Criticism of Micro Lending:
It should be noted that Kiva and (to my knowledge) all other microcredit organizations charge interest on the loans that they give. There has been criticism of the micro-lending process. The interest rate can be 30-50% a year depending on the country. Additionally, there have been reports that certain people take out additional loans to pay back their previous loans, similar to what many poor people in the United States are forced to do once they are trapped in a cycle with Pay Day lending. One advantage that Kiva has, is that it is transparent and the lenders know who the money is going to and how the money is being spent.

Conclusion
I still believe that as a whole, microlending can provide benefits to many poor people in the world. There is the possibility of trapping users into a continuous cycle of loans to pay off the previous loan's interest. However, Kiva is transparent and allows the lenders to see exactly who the money is going to and how it is being spent. If you see any cases where it is apparent that the borrower is getting another loan jut to pay off the interest in the previous loan, please withdraw your money from that organization.

Any loss in transparency (as with buying a bond and investing in a micro-lending organization which then dictates who the loans are given to) could potentially lead to abuses by the lender authorities. Although earning interest offered by Micro Loan is enticing, the lack of transparency is a significant problem for me and I would not feel comfortable knowing that people might be taken advantage of.

I will definitely have to research this topic more to understand it more. I plan to read the books that I've listed in the recommended reading.

My New Gift:
Despite the potential problems with microlending I still believe it is a good cause and will support it. In today's world there is so much emphasis on material wealth particularly around the holiday season. But how many times have you received something material for your birthday or Christmas but absolutely hated it and never used it? I can't count the number of horrible gifts I've received in my life but here are a few examples:

• Hanson - Middle of Nowhere CD (I still have the CD shrink-wrapped and maybe it will become a collectible in the future.... just maybe)
  
• Hooded sweatshirt with pockets on the back (why would you need pockets in the back... unless you're inviting someone to feel you up)
  

From this point on, unless I know that a person specifically wants a certain gift and will be 100% happy with it, I will only be giving them Kiva gift certificates or other forms of socially responsible investing. This gift has virtually no environmental impact because you can pay with a credit card and send a printed gift certificate (or better you can just send them an email). Even if they don't like the idea of the gift, a borrower will be funded and the gift receiver will eventually get the cash back. It is a great cause and it really does improve people's lives.

If you have an extra $25 that could go to charitable causes, think about socially responsible investing and lending that cash to Kiva.

Recommended Links

• Kiva
• Micro Place
• Grameen Bank Information

Recommended Books

• Banker to the Poor: Micro-Lending and the Battle Against World Poverty - Muhammed Yunnus
• The Economics of Microfinance - Beatriz Armendáriz
• The End of Poverty: Economic Possibilities for Our Time - Jeffrey Sachs