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Itsy bitsy loans
A website that helps people in developing countries get small loans has opened its business to US entrepreneurs. It's an encouraging, non-governmental solution for the economy. But the question is: does microlending actually work?
First, the basics on the story from NPR:
Premal Shah, the president of Kiva, says the San Francisco-based organization thought it might help the economy in its own backyard.
"We know that small businesses are the cornerstone of the economy. It's a real growth driver of the U.S.," Shah says.
"Even before the credit crunch, small business loans were hard," he says. "Post credit crunch it's really, really hard. So, Kiva started thinking, 'Wow, we're allowing people in the developing world to request loans, why not un-crunch America and allow people here in the U.S. to request loans and see if the Internet community wants to fund them."
Many people do want to chip in. Others don't. They say too many people around the world need the money more:
A small number of people who make loans on Kiva.org protested the decision, including Tom Behan, a retired marketing executive in Seattle.
"In shifting their emphasis or some direction toward the U.S., they began diverting their time, money and resources from the have-nots to the haves, and that really set poorly with me," he says.
But new studies suggest microlending is pretty unsuccessful at fighting poverty.
The Boston Globe points out two forthcoming research papers:
What they find is that, by most measures, microcredit does not offer a way out of poverty. It helps a few of the more entrepreneurial poor to start up businesses, and at the margins it may boost the profits of existing microenterprises, but that doesn't translate into gains for the borrowers, as measured by indicators like income, spending, health, or education. In fact, most microcredit clients actually spend their borrowed money not on a business, but on household expenses, on paying off other debts or on a relatively big-ticket item like a TV or a daughter's wedding. And while microcredit champions point to microloans as a tool for empowering women, the studies see no impact on gender roles, and find evidence that if any one group benefits more, it's male entrepreneurs with existing businesses.
You have to wonder whether such small amounts of money will really help businesses in this country or just put off problems that require more significant capital. On the other hand, every little bit helps and hallelujah for a solution that doesn't involve the government.
Your thoughts?
UPDATE: After writing this post, it was pointed out to me that Marketplace aired a couple of pieces on this subject over the summer. I missed or didn't recall them. But let me add the links here, as they provide good examples and depth on how this works:
From Marketplace PM, a feature on Kiva opening its business to US entrepreneurs.
From Marketplace Money, a good interview with Kiva's CEO.
Scott:
I've been a Kiva lender for a few months now and have been a part of two loans so far. I believe I made my first loan right around the time when Kiva opened up to US borrowers. Some lenders were upset, but I'm pretty ambivalent about the situation. In my perspective, the microloan procedure makes the giving process quite personal and one can easily pick and choose if they want to loan to someone within the US rather easily. One issue that I can empathize with is the size of the US based loans which frequently reach upwards of $10,000. $10K would easily fund several loans to borrowers in much less prosperous countries than the US.
As to the question of whether these programs work, I'm really not sure. I trust the validation process Kiva uses to insure the loans are disbursed and generally used as intended. I try to provide loans to individuals who have a clearly articulated Property, Plant, and Equipment requirement for which they are seeking funding rather than lenders who request funds to purchase additional stock for their business. One of my loans went to an individual in Africa who sought to purchase, rather than rent, a motorcycle taxi. The other loan went to a farmer in Southeast Asia who was building a shelter for his herd of goats.
Ultimately, I consider the loan process as a form of charitable giving, albeit one with a bit of entrepreneurship injected into it.
I think microfinance could work in the states definitely! I agree with the above poster though we'll never know what innovative solutions that could have been since the government decided to prop up these banks.
And the Boston Globe is foolish in thinking that microfinancing is unsuccessful. Tell that to Muhammad Yunus, a Nobel prize winner, and his Grameen bank.
Well, haroon, I'm sure Yunus would say microlending is a huge success. The research papers are saying, wait a minute, let's look at the evidence. Perhaps, as a way out of poverty, it's not quite as successful as some people make it out to be. But as Jiten points out above, it does offer something meaningful and tangible - a starting point - and that is important, too.
Scott ... I understand what the Boston Globe points out, and there may be some truth to it.
However even with capitalism there are people who are left behind, regardless of the reason, and so what can one infer from that(?), that we throw out capitalism.
Similarly, microfinance is not the panacea for poverty alleviation but it sure offers something meaningful and tangible for those at the bottom of the totem pole to help get them out of poverty through some form of micro enterprise.
Granted microfinance institutions have done a poor job of measuring impact, and more needs to be done in terms of independent studies and one that tracks impact over a period of a couple of years. One cannot simply draw conclusions based on data collected over a period of less than a couple of years.
Ona personal note, when one sees the microfinance clients the first time that they come to take a loan, they are a picture of insecurity, lack of confidence about the whole venture, however when one sees them again a year down the road the person one sees, in most cases, has been transformed, walking with an air of confidence and feeling good about themselves. Now does this mean that they have lifted themselves out of poverty, no not necessarily, but it does have a bearing on their future success. And most importantly, when a child sees this positive transformation in their mother, aunt, grandma, sister, etc this has lasting positive impact on them - that they too can achieve something in life.
Hence lifting oneself out of poverty is not just a one-dimensional issue.
jiten
I think this is a prime example of why we should not have bailed out the large banks.
I think if we had let them fail the marketplace would have responded by providing new and more innovative solutions, like this.
Instead, we just ended up protecting the huge, inflexible, old, outdated, banks.
I agree in saying that I believe Kiva and the mircrofinancing institutions it works with, work with the lender to ensure that the money gets spent for what they are applying to use it for.
In that case, I would rather lend my money out, have some kind of impact, and then get repaid, then give it out to a particular charity where often it can be lost in administrative and beaurocratic costs.
