I like this

[Qqmike]

Not new, it's been around and featured in various media, but I took the time to read the details this morning, and it really looks worthwhile. Not any sort of being "The Solution," but certainly part of a solution along with other efforts. I like the idea of this--microfinancing micro-"businesses." Certainly worth $25-$100. Average loan made is $35 (I read somewhere), but I suspect the standard deviation is large (probably most folks loaning $25-$50 per "investment" and a few wealthy/generous folks lending big money). Site is complete and candid about both upsides and downsides (risks). Lots of brand-name corporate sponsors. Founders/personnel have solid credentials.

http://www.kiva.org/app.php?page=home

[toad]

Re: I like this

ditto!!!

[DeathKitten]

Re: I like this

I watch the blog on http://www.venganza.org/ and recently, they got together a team on Kiva and put together a goal of $100K of helping people... which they recently by passed and they're still going.

Check it out: http://www.kiva.org/team/fsm

[askrieger]

Re: I like this

I read an article recently about micro-lending. (I wish I had a reference, I think it was last sunday's Boston Globe, but I could be wrong.) The article reported on a study, by some experts on the economics of less developed countries, that claimed that almost all micro-lending projects fail. The mini-entrepreneurs usually have no idea how to run a small business (Take it from me, it ain't easy.) Their ostensible advisors are often as ignorant of local customs as the recipients are of capitalism and there is almost no follow-up.

My advice would be to ask how much money goes to the organizers of the site? But I'm just a cynic.

Later: Found it! (in the trash)
Boston Sunday Globe Sept. 20, 2009 (page K1):
Small change
"Billions of dollars and a Nobel Prize later, it looks like microlending doesn't actually do much to fight poverty" by Drake Bennett

[Snowhog]

Re: I like this

For the Google challenged, the article can be found here.

[Qqmike]

Re: I like this

Nice article, thanks for the tip and the link. Excellent article.

Key points I pick up:

-- 98 percent repayment rate => the micro-lenders are safe.
So, then what becomes of the money loaned? That's the focus of the article.

-- "...there’s a place for microcredit in the campaign to help the world’s poor, it’s just not a very big one." (but maybe too soon to tell how big the ffect can be ...?)

-- "For microcredit’s defenders, evidence like this is, at best, an incomplete portrait. In part that’s because of the relatively short time horizon of the studies ... Microcredit’s more dramatic effects, they suggest, may take longer to appear than the 1½-to-2-year windows the researchers looked at."

-- "Other microcredit proponents argue that the fact that microcredit has proliferated as fast as it has, with new clients signing on in droves and old ones coming back repeatedly [emphasis added], means it must be providing a reliable benefit to borrowers, if only by allowing them to pay off higher-interest moneylender loans."

-- “The picture that emerges is not of people climbing out of poverty through microenterprise, but people doing what they need to to get by...”

-- "But it’s a basic tenet of economics that scale [emphasis added] has its advantages. Forty workers at a textile plant are going to be much more productive than 40 microentrepreneur weavers each working by themselves ...
Partly in response to these concerns, Grameen itself has begun to offer a line of loans of up to $10,000 for what might be called mini- rather than microenterprises. And in a more marked shift, a few NGOs have begun to focus on the previously neglected sector of medium-sized businesses in the developing world, looking not just at loans, but buying equity stakes in the companies to provide them with interest-free money. They’re bigger investments, and in the end they may have far bigger returns."



My feeling is that there is a place for microcredit to microbusinesses not so much to solve poverty but to keep people going, giving them some glimmer of hope, encouragement, perhaps keeping them active and moving and trying, rather than being immobilized in depression or alcoholism or whatever.

It's an act that brings people closer together, sending some sort of message (both ways) that we are all in this together.

Two key points: The time horizon for results should be longer, not just 12 months. And along with microlending, it is important to start and service the mini-lending market to get some of the "scale" effect.

Gotta remember that the small business failure rate in USA is high. Developing a successful small business is not easy in any economy. Having been in small business myself for 25 years and having also been a small-biz consultant and professor, I've seen both the upside and downside of being a small-business entrepreneur. A lot, if not most, small businesses just get by, they pay the bills and have a little left over, earning a living, but that beats NOT doing it.

Back to microlending, there's always the motivating prospect of hitting the low-probability jackpot of helping a small number of micro-entrepreneurs achieve a better-than-poverty level of success, perhaps even pre-mini levels or mini levels, but at least some degree of self-sufficiency or even just a degree of comfortable "maintenance."

And the clincher--favoring the effort of microlending--is the small amounts of money involved and the high repayment rate. You breakeven on your $25, the borrower maintains, gets by, and some borrowers continue to try to improve and maybe even set their sites higher.


btw, technical point:
as explained at the kiva.org site, the interest rate on a small loan is going to be higher than on a larger loan simply because of the effect of the fixed cost component of the loan (a $5 fixed O/H loan cost is 5% of a $100 loan but only 2.5% of a $200 loan).

[GreyGeek]

Re: I like this

http://www.kiva.org/about/aboutPartner?id=22

Microfund:
Average Interest Rate and Fees Borrowers Pay (Portfolio Yield): 35.65%

Wow, and I thought American credit card companies gouged.

Microfund is making some serious cash off the backs of the poor.

http://www.scam.com/showthread.php?t=76720

I searched for "kiva" on here and found no hits. That seems unlikely - sorry if I missed a duplicates.

Kiva is a non-profit. They take your donations and distribute them to microfinance lenders all over the world. Those lenders disburse the money to entrepreneurs in third world countries, who pay back the loans in installments. You choose the specific entrepreneur to fund, and as they pay off the loan, the money you donated is returned to you. A lot of good, lasting change is generated by giving these people access to capital.

The problem is that the loans are NOT given out interest free. You give your donation free of charge, and Kiva gives it to the loan companies free of charge, but the loan companies charge the borrowers very high interest rates. The average rate is 23% - in the US, that would be "Payday Loan" territory.

This is not made very clear on the Kiva website. In fact, the Kiva website says that you are making a direct, "one-on-one" connection with the borrower, and call it a "person-to-person" loan. You have to dig quite a bit to find out that your money is being passed from Kiva to a for-profit company, and even more to find out that they are earning an average of 23% interest on your donation.

Yes, there are good reasons for that high interest rate. These loans are small, so the initial cost to set them up is an unusually large part of the total costs, making the interest rate seem higher. These borrowers are also supposed to be high-risk, but the average default rate for all Kiva loans is only 2.85%.

The microfinance loan companies partnered with Kiva have loaned an average of $55 million dollars, at an average of 23% interest, with an average default rate of 2.85%. That's an average PROFIT of almost $11 million dollars.

Microfinance lending is a GOOD thing, and a worthy cause for your donations. I even applaud these companies, because they are helping people and have found a way to make money while doing good work.

But they are NOT charities. I don't see why a company that has made $11 million dollars -- off of poor people! -- needs more free money from me. Would you donate food to Feed the Children, if they were selling it to starving kids at a 23% markup? With a 23% ROI, these companies can afford to put everything on Visa and still make a profit!

I don't think the Kiva website makes this clear enough, and I don't think these companies deserve free use of your money. If you want to donate to microfinance, go to one of the groups that don't do it for profit, like the Rotary micro******* program. http://www.rotarianmicrocredit.org/

All my figures are from the Kiva website - use the "Kiva average" numbers from any "Microfund Partner" page. Note that the main Kiva pages do NOT mention any of these figures!
http://www.kiva.org/about/aboutPartner?id=22

[Qqmike]

Re: I like this

@ GreyGeek -- That is also an interesting view on all this. Thanks.

[askrieger]

Re: I like this

Two more comments (ignore at will).

1) I actually lived in an underdeveloped (but not developing) country for a while (at Uncle Sam's expense) when I was a lad. The residents were among the hardest working people I have ever met. However, their hard work was often inefficient and comparatively unrewarding. Can you imagine two workman sitting in the middle of the street taking turns hitting a cold chisel with hand hammers to repair a pot hole? It took two days. Contrast that to the procedure in the developed world, where a crew shows up with a pneumatic drill, a cop directs traffic around the site, they make a lot of noise for an hour, pour in the filler, put up an orange cone, pack up and drive off. In another incident,I once saw a "master mechanic" (with two assistants) spend more than half an hour replacing a spark plug on a GMC truck. No one could read the manual These were not rare occurrences. Don't ask about the clueless mechanics crawling around on the wing of a plane, I was sitting in.

My epiphany about the underdeveloped world was that they needed infusions of capital equipment and knowhow. Regrettably, the labor of these people who made about a dollar day (adjusted for subsequent inflation) was only worth a dollar a day because of their lack of (a) capital equipment, and (b) knowledge. I don't think micro-lending is going to solve those lacks.

2) The fact that an ORGANIZATION is non-profit does not imply that it isn't making a great deal of money for the people who run it, (see the National Geographic Society), or evil (too many examples, to list).

Accordingly, I remain sceptical about both the concept of micro-lending and its practitioners.

[Qqmike]

Re: I like this

I'm certainly re-thinking this subject. Not quite sure what to conclude just yet.
People from developing countries have told me about other problems that could interfere with normal business activity (bribes, theft, gov't corruption, killings, etc.).

[askrieger]

Re: I like this

I must confess that my wife disagrees with me on this topic. In fact, without this post, I'd probably be eating unthawed frozen food for the next week. (Just kidding.) Her point is that micro-lending tends to empower women. This is a worthwhile end by itself, especially in third world countries. In addition, there really are situations where even a tiny infusion of capital can make an enormous difference. I still maintain, though, that simultaneous infusions of capital equipment (not cash) and education in how to use it are the way to jump start development..

[dibl]

Re: I like this

After 40 years (since college) of listening to the verbalized agonizing on the general subject of "helping the poor", I have developed a theory of "cultural poverty". I think most (like 95%) of folks who are seriously poor, in the USA and/or in foreign lands, are culturally poor, first and foremost. In other words they:

- lack education, and any sense that it is important
- lack meaningful employment, or any sense that it is important
- do not have a family or community history or sense of "origins" that binds them together
- teach these same values to their children, from generation to generation, perpetuating their cultural poverty

As a consequence, they don't have much money or material goods, either. This is "economic" poverty.

The tendency of the "liberal" or progressive part of society is to focus on the economic poverty, not recognizing that it is a direct result of the cultural poverty. You can throw money at the economic poverty, and fix it for a very short time, but when you do that, you don't touch the cultural poverty that lies behind it. Money cannot fix cultural poverty -- only culture can fix cultural poverty. Therefore sending money to folks who are suffering from cultural poverty is doomed to fail, unless you intend to provide a permanent stipend to poor folks, in lieu of their own productive resource generation.

That's my two cents' worth, and as close to politics as we probably ought to get in a Linux forum.

[GreyGeek]

Re: I like this

.... Her point is that micro-lending tends to empower women. ...

I have no doubt she's right. I've seen video essays on Public Television that demonstrate that. As was pointed out, however, letting financial institutions that charge 35% interest rates finance the women is, in my mind, the worse kind of exploitation. Especially when there are institutions which charge NO interest. One wonders why Kiva allows such explotation IF their goal is HUMANITARIAN aid.