Micro-lending
Contents
I. Point of departure (2006)
II. Interim update (2009)
III. Current status
I. Point of departure (2006)
By way of an introduction to microloans, a summary from a 2006 entry on Kevin Kelly´s Cool Tools website follows. He introduces his research with:
"Previously I've recommended the micro-finance cool tools of Trickle Up, Opportunity International and my favorite, Heifer International, as three ways to leverage small amounts of money for maximum global good. Micro-finance programs are not a panacea. For a critique, start with this: Microcredit is booming in India, but. . . in Forbes."
The Forbes article points out that only one fifth to one third of microloans are actually used to start a business. Often the funds are used for (urgently needed) consumer purchases. In Bangladesh the system is set up so that ideally a bank officer visits the borrower/borrowing group weekly, forever. However in India, the hotbed of microlending with over 1000 microlending institutions serving 15 million customers, that is just not possible. The lending officer to borrower ratio is frequently over 400 to 1. One should note that interest rates are often high, 20 to 30 percent.
Bridges therefore sees a need to provide "nuts and bolts" business basics to those borrowers who actually do start businesses. The providers of this guidance do not need to be veteran entrepreneurs or sophisticated MBAs. They do have to understand basic business finance, i.e. cash flow, and to have common sense. And above all they need to be culturally acceptable to the rural, or urban, poor whom they are advising. Bridges hopes some day to play a role in organizing the "micro-coaching" so badly needed to support the microloan ventures.
Accion
Accion provides technical assistant to local micro-lending institutions. Its goal is to enable micro-lending institutions to become self-sustaining. Several of Accion's have, in fact, made the transition from total dependency on charity to being largely self-financing. The minimum contribution to support Accion was $50.
FINCA Village Banking
FINCA lends money to a group of 10 to 50 persons who form a village banking group. The group in turn makes loans to fellow villagers. These range from $50 to $500. With a contribution of $5,000 one could create a village banking group. makes loans directly to the poorest villages. The minimum contribution to the program was $50.
Dan West, an American farmer, helped refugees in the Spanish Civil War (1936-39). After returning to the U.S., in 1944 he founded Heifer International to provide livestock, cattle, geese, also honeybees, to poor communities. ("Heifer" means young cow.) Headquartered in Little Rock, Arkansas, the foundation has provided seeds, livestock and training to people in 125 countries. The focus is on sustainable projects. Do not give a "cup of milk," but a cow. (Its first project in 1944 was shipping 17 heifers from the U.S. to Puerto Rico.) A current example would be a project for pumping fresh water in the Long Phu District of Vietnam. (2010)
Grameen Foundation (GF)
Muhammad Yunus won the Nobel Peace Prize for founding the Grameen Bank in Bangladesh. It is the original micro-lending concept, and the inspiration for On- line micro-lending. GF, owing its origins to the Grameen Bank, is perhaps best known for Village Phone. Women buy cell phones with a loan. They repay the loan by renting the phone to other users. GF's first attempt to scale the program outside of Bangladesh was in Uganda. Internet access fees in Uganda are remarkable, $100 to $250 a month in one of the poorest countries in the world, with a per capital GNI (Gross National Income) of under $500 p.a.1 In part this reflected a national telephone network that could not handle heavy Internet traffic.
Village Phone has been a resounding success in Uganda. Already by 2005 over 3,500 microloans for "Village Phone operator" had been granted. These operators often provided the first local phones the villagers had ever had, thereby creating a national telecommunications network. This network has had a major impact on these communities, both in terms of improving both economic opportunities, medical treatment, and safety.
Namaste Direct (ND)
ND is a person-to-person micro-lending program. One provides funds directly to an individual, about whom one is provided information. One receives progress reports about how the money is being used. ND will even arrange a meeting with the borrower. Unfortunately this direct lending concept requires a great deal of management time and effort. Therefore the program is quite limited. It began in Guatemala and made its first attempt to scale in Mexico in 2005/2006. At that time there was no minimum contribution.
Al Whittaker left his job as President of Bristol Meyers International (of the Fortune 500 firm) in 1971 to start a charity in South America in 1971. In 1979 he joined forces with the Australian entrepreneur David Bussau to start Opportunity International, a Christian foundation. It is a major player in 20 countries with a broad range of activities. On the one hand, individual loans can be as small as $60. On the other hand, it has helped create nine banks for microlending. In 2002 it also started the world's first microinsurance intermediary, MicroEnsure. It offers property, crop, health and also funeral insurance.
Seed capital and training for the very poor are provided in five countries. These are Guatemala, Nicarauga, India and two West African countries which neighbor one another: Mali and Burkina Fao.
Unitus
Unitus, like Accion at the head of this list, funds other local micro-finance programs, rather than direct loans to individuals. "Unitus seeks to identify highest-potential emerging MFIs (Micro-Finance Institutions) and help them to achieve exponential growth." Unitus was one of the first programs to accept PayPal, making it easy to contribute to. The minimum donation was $100.
II. Interim update (2009)
An excellent report has been written (2009?) by A. Ashta and D. Assadi, "An Analysis of European Online Micro-lending Websites," cf. www.solvay.edu/EN/Research/Bemheim/documents/wp09059.pdf. The article is published by the Centre Emile Bernheim, Research Institute in Management Sciences, assoiated with the Solvay Brussels School of Economics and Management (e-mail: ceb@admin.ulb.ac.be Tel. : +32 (0)2/650.48.64). The following excerpt is from the third page of this report:
"Kiva,an American company, started an online micro-lending model in 2005 to target mainly the needy entrepreneurs in the developing countries. This too was duplicated, with variations and adaptations by many operators. In Europe, we find MyC4 and Babyloan. However, models are mushrooming all over the world, with a number of them in India alone.
Although traditional microfinance has developed in poor countries, today many developed countries are also using the system with adaptations based on local cultural differences. The online lending movement started in March 2005 with a European firm called Zopa, UK. Since then Zopa has gone to the the U.S., Italy and Japan. Its model, with variations, has also been adapted by many other competitors. Today, there are more than a dozen for-profit commercial operations in the online peer-to-peer lending market. In Europe these include operations such as Zopa, smava, boober, Kokos and Monetto.2
This French organization has provided over 2,000,000 € to some 6,400 micro-entrepreneurs in 137 countries (July, 2011).
Kiva was founded in 2005, is active in 59 countries and makes loans as low as $25. The website states a 98.79% successful repayment schedule on $232 million of loans disbursed. Depending on exactly how one defines the terms "loans disbursed" and "repayment," both figures, and especially the latter, seem a little optimistic. (July, 2011)
Participants from over 100 countries have lent 13,600,000 € to 6,800 small businesses in seven African countries. Loans can be as little as 5 € ! A nice aspect of its website is transparency. Under "loans" it provides believable statistics about payment rates, including frank disclosure of a high default rate. (July, 2011)
SKS is one of the major players in India. Its interest rates are generally 25% to 30% (2010).
III. Current status
Check the websites above for the current status of these programs. Google them, noting that several have articles written about them in Wikipedia. Use them as a benchmark for other (and newer) programs that have been developed since then. Do your due diligence about what percentage of funds provided actually lands in the hands of the intended recipients.
In the U.S. there have been, over the decades, several exposes of religious drives for various good causes. These include relief for famine in Africa and earthquakes and floods in Asia and South America. Both Christian and non-Christian drives have illicited the scrutiny of investigative journalists. In extreme cases, 90% of the funds donated somehow or another stuck to the church, mosque, temple, etc. What actually reached the starving, injured or homeless was a paltry 10%. Certainly such extreme cases are a minority, but how much of one? Does one charitable religious drive in 1,000 get "sticky" or is it more like one in 100, one in 10?
Therefore my personal preference is for "doing well by doing good," i.e. to invest in a lending pool where a modest return on investment is strived for. That means there is a chance that you might get some of your money back! I also like the direct contact aspect of Namesta Direct, and the frank disclosure of MyC4.
1 The cost of accesing the Internet in Uganda is astonishing. In 2011 two offers found on the Internet were a) $380 sign-up fee and $100 monthly afterwards and b) $250 a month, no extra sign-up fee. Estimates for annual per capita GNI (Gross National Income) for Uganda range from a low of $217 to a high of $460. The German/U.S. per capita GNI is, using admittedly a rough estimation, $3,000 a month versus, say, $30 a month for Uganda, i.e. a 100 to 1 ratio. A person in Uganda pays three to eight times the monthly GNI figure for ONE month's Internet access. That would translate into Internet access costing an American or German $9,000 to $24,000 per month! Internet would be a large company tool, not a small company or private one.
2 This last sentence is not entirely accurate, at least not today (July 2011). Boober, Kokos and Monetto do not appear as micro-lending institutions on a Google search. Smava GmbH is a German peer to peer lending intermdiary headquartered in Berlin. The lending range of 1,000€ to 50,000€ is beyond what one usually associates with microloans. This reservation also applies to Zober, headquartered in London. It has essentially the same business model as Smava and a lending range of 1,000 pounds to 15,000 pounds.
Both firms appear more oriented towards personal loans, and perhaps upon occasion working capital for small firms, then start-up loans. Nevertheless they are mentioned as "long shot" possiblities for part of the financing package for entrepreneurs in "B. Blue Start Start-up Strategy for Entrepreneurs" at VI. Start-up Strategy at Services.
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