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Itsy bitsy loans

Scott Jagow Oct 13, 2009

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 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.

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