More than 92.9 million entrepreneurs in the world’s poorest countries are receiving a helping hand from scores of microfinanciers, according to a 2007 Microcredit Summit campaign report.
The basis of microfinance is this: give the working poor access to bank services in the form of microloans, small amounts of money that even ordinary people can lend, but big enough to finance the startup or expansion of small businesses overseas.
Microlending originated in 1974 during a severe famine in Bangladesh. Local economist, Professor Muhammad Yunus, lent $27 from his own pocket to a group of women in Jobra village for the purchase of bamboo to make and sell stools, according to Banker to the Poor: Micro-Lending and the Battle Against World Poverty. Yanus expanded his efforts throughout the country and eventually opened the Grameen Bank in 1983.
The microfinancing phenomenon has since opened the pockets of socially responsible investors internationally. Kiva, a nonprofit microlender based in the U.S., allows people to lend as little as $25 to entrepreneurs in developing countries. Potential lenders browse through profiles of entrepreneurs in need on Kiva.org. Lenders use PayPal or credit cards and Kiva collects and transfer those loan funds to microfinance partners. The money is then distributed to pre-selected entrepreneurs. Once loans are repaid, lenders can choose to re-lend, withdraw or donate the funds to Kiva.
To date, Kiva lenders have issued 48,369 loans totaling $33.9 million. The average loan per lender is $111.46, and 98 percent are successfully repaid.
Frequent Kiva lender Ann Brown, of Seattle, Wash., says the site is “brilliant.” She’s made 31 loans, totaling $900, and says she always reinvests the repayments.
“You can keep giving back. It’s exciting to read the bios and choose someone you can help with just a little money,” says Brown, who receives no returns on her loans. “It’s just something you do with your heart. The big picture is that it always pays back. What we get back is way more than you could get in interest.”
Profits, however, are an attraction to some microfinancing organizations like the Denmark-headquartered MyC4.com, which lets lenders set interest rates within a limit and bid on African businesses to lend to. MicroPlace, owned by eBay, is another profit-rendering site where investors can help the poor through microfinancing. The site allows users to purchase investments from securities brokers who use the funds to invest in microfinance. The issuers then make principal and interest payments back to lenders.
Mexico-based Banco Compartamos, a former nonprofit non-governmental organization (NGO) turned for-profit bank, sparked controversy after banking high interest rate profits (nearly 100 percent) from loans made to poor Mexican women. According to Insight, a publication produced by NGO microfinance organization and Compartamos shareholder ACCION, Compartamos sold 30 percent of its stock on the Mexican stock market in an initial public offering (IPO) for $458 million in April 2007.
Both critics and supporters of Compartamos agree that profits and private capital are necessary to continue to fund microfinancing endeavors, but the debated issue is whether huge profits are unethical.
“Without firm commercial foundations, microfinance cannot become the profitable business that it needs to be in order to survive,” says Elizabeth Littlefield, CEO of Consultative Group to Assist the Poor (CGAP). “But without firm ethical principles and a commitment to benefit poor people’s lives first and foremost, it will no longer be microfinancing.”
Littlefield was among 26 leaders of microfinancing institutions, investors, banks and development organizations to sign The Pocantico Declaration, a call for a code of ethics “that would help microfinance to navigate between commercialization and its social mission.” Managed by The Rockefeller Fund, The Pocantico Conference Center hosted the microfinance leaders retreat this past April in New York.
AP Image...Afghan women trained by Care International in a microfinance program collect weekly installments from other Afghan women in Kabul, Afghanistan. Many war widows and poor women use the microfinance program to form self-help groups to pool their savings, which they then turn into a revolving fund to provide loans to group members. Funded by World Bank, the project goal is to improve the economic security of 1500 households (7,500 beneficiaries) in the targeted communities in Kabul city.