Giving Doctor: Examining Micro-Credit

“I want to help people in the developing world and considered sponsoring a child or buying someone a goat. Then I heard about microcredit. Is that a better way to give?”

The Essentials:

•  Microcredit is the lending of very small amounts of money to individuals living in poverty

•  Recipients are given flexible, usually interest-free micro-repayment options

•  Microcredit aims to empower the recipient by funding income-generating self-employment projects, improving quality of life for the individual and their family

•  While examples can be traced back to the 18 th century, microcredit really came to the fore in the late 1970s when Bangladeshi economist Muhammad Yunus founded the first microcredit institution – the Grameen Bank. Yunus and Grameen Bank were jointly awarded the Nobel Peace Prize in 2006 “for their efforts to create economic and social development from below”

•  The United Nations declared 2005 the International Year of Microcredit, recognising it as an instrument for socio-economic development

The Players:

•  Microfinance Institutions (MFIs) provide financial services to clients who are otherwise ineligible for traditional bank services

•  The World Bank estimates there are over 7000 MFIs turning over US$2.5 billion by servicing some 16 million people in developing countries*

•  MFIs can vary in their legal structure, mission and methodology. They can range from small not-for-profit organisations to financial NGOs and large commercial banks

•  MFIs are also termed Field Partners by online person-to-person (P2P) microcredit facilitators, acting as the intermediary between the individual lenders and the loan recipients

•  Recipients of microcredit are generally poor, often vulnerable people living in developing countries who require a loan to start up a small business

•  Recipients typically don’t qualify for standard sources of credit because they have no collateral, steady employment or acceptable credit history

•  Referred to as “entrepreneurs” by some MFIs, their appetite for enterprise is mostly necessitated by lack of employment opportunities, shelter or food rather than a desire for profit

•  Business projects vary across agricultural, retail, production, transportation and service-provider sectors

•  Women make up the vast majority of microcredit recipients, accounting for 97% of Grameen Bank loans

•  As well as MFIs, hundreds of thousands of individual lenders around the world make P2P interest-free microloans through websites like Babyloan, Wokai and Kiva

•  Lenders’ motivation can be altruistic, socially driven or self-satisfying

•  Lenders can join lending teams such as “Teachers for Change”, “Animal Lovers” and “ Kiva Kiwis” in order to connect with others and make a greater impact

The Pros:

•  Microcredit empowers recipients by harnessing their energy, knowledge and determination to overcome the hardships they face in providing for their families and running their households

•  Microcredit promotes gender-equity by supporting women’s economic participation in cultures which often forbid them financial independence

•  Microcredit cuts out loan shark traders who lend money to vulnerable producers on the condition that they have exclusive distribution of their finished product at a set price

•  P2P lending educates people about global poverty by connecting them with impoverished individuals

•  Because of the small cost to lenders, microloans are frequent and generous, making funding targets relatively easy to reach in comparison to much larger fundraising projects

The Cons

•  Providing credit to vulnerable or inexperienced people can land them in an even worse financial situation if they find themselves unable to use it productively or unable to repay their loan

•  Microlending can draw private and community-level donors away from funding infrastructure such as roads, education and health. Economists and poverty experts note that the net effects of microcredit (a relatively nascent phenomenon) are largely unknown, as compared to the benefits of building a rural factory that creates hundreds of jobs

•  P2P microcredit means that lenders come to expect a face or a story in order to deem a cause worthy of their contribution, rather than donating to an equally-needy cause that distributes funds at its own discretion

•  Recipients and lenders are very much at the mercy of their MFI. A recent analysis of Kiva data concluded that the failure of just three MFIs caused 93% of all Kiva defaults to date, despite the faithful repayments being made by recipients

The Case Study: kiva.org

“ Kiva,” the world’s first online microcredit facility has recently come under scrutiny for its deceptively simple working model.

Kiva’s enormous success is most likely due to the faces and stories it proffers for fundraising. However, while lenders are invited to browse the pages of entrepreneurs for a deserving recipient of their microloan, the reality is that Jaber the Palestinian livestock trader may already be knee deep in sheep on someone else’s $25. Meanwhile, the funds you earmarked for him are possibly paying off a motorbike for Srun Nan, the Cambodian cake seller.

This is because MFIs (or Field Partners) often pre-disburse funds to recipients before they’re even profiled online. This allows Kiva to service its borrowers’ needs more efficiently, but it can be argued that it virtually fictionalises the direct connection between the lender and their chosen entrepreneur.

Does it really matter whose farm, shop, or family benefits from our loan? Isn’t an investment in P2P microlending really a premeditated decision to help all of those less fortunate than us?

A straw poll of Kiva bloggers showed that many people think it shouldn’t matter. While some were slightly disappointed by the ambiguity inherent in the model, others have continued to lend for years knowing full well that their nominated entrepreneur isn’t necessarily taking the credit.

“Ian” summed it up well: “Nothing is perfect, we are all human (for good and bad) … but my belief is that doing nothing is far worse than attempting to do something.”

This week on www.kiva.org:

•  5117 new lenders joined

•  20,326 lenders made a loan

•  US$1,270,100.00 was lent

•  3437 entrepreneurs were funded

•  98.27% of loans were repaid to date

•  1 loan was made every 15 seconds

*source: Data Snapshots on Microfinance - The Virtual Library on Microcredit