Donations are out, loans are in

Wednesday, May 16, 2007

By Sam Petri

Microfinance, the practice of lending small amounts of money to the poor in order for the poor to lift themselves up, has existed for centuries. But until recently, it hasn’t always worked. Many Microfinance Institutions (MFIs) of the past and some of the present borrow large amounts of money from commercial banks at say, 15 percent, to lend small amounts of money to their many customers at rates as high as 35 percent. With the poor unable to afford an interest rate that high, the model fails.

San Francisco based Kiva.org uses the Internet to connect venture capitalists (you!) with the entrepreneurs of developing countries in hopes of ending global poverty. Here’s how it works: sign on to kiva.org and find a third world entrepreneur you’d like to invest in. Most need no more than one thousand dollars to get their business started.

Using a Paypal account, you can loan as little as $25 – a portion of the total amount needed – to any entrepreneur in select developing countries. Other Kiva members do the same until there is enough money to make the loan to the individual. You then  watch your money at work while the businessman or woman tries to leave poverty and enters the world’s workforce. Once your loan is repaid, you can choose to cash out, or reinvest your $25 principle into another business. According to Kiva, they’ve had a 100 percent return rate on all loans. 

No, you don’t gain interest on your loan, and neither does Kiva.org; they are a 501(c)(3) nonprofit. Your money works its way through Paypal to an MFI that Kiva has partnered with. Because your money arrives at the MFI without a fee, the MFI can charge their customer a much lower interest rate, typically 16 percent, according to Kiva. The MFI must charge this rate in order to pay their local loan officers to make sure the microloan (your money) is repaid.

It’s a loan cycle that appears to be working, as Kiva has been in operation since the fall of 2005. Valley residents Chad and Katie Jackson have recently sponsored two different female entrepreneurs: a single mother in Haiti who wants to start a cooking operation, and a single mother in Togo who needs equipment to improve her onion farm. In both cases, their microloan completed the total funds needed by the businesses. Over 20 international investors loaned money to these businesses to complete the $1,200 loan needed.

“Kiva is a more personal way to donate money,” said Katie. “You can keep up-to-date with their status, track their changes, and see where your help is going.”  She continued, “You’re not giving them fish, you’re teaching them how to fish – they are creating business for themselves. It’s investing in other people.”

Some people in the world live day-to-day on pennies; a microloan could be their ticket to financial independence. Once established, these people can grow their businesses, perhaps helping to end global poverty by giving others a chance at a job.

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Donations are out, loans are in | Planet JH News Article: Business

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