If you haven't heard of microlending yet, you are not alone. Although it is primarily something that has been found in third world countries, the U.S. is also in the microlending market. What makes microlending unusual is that it can be done by just about anyone and the amounts that you lend can be quite small. Some of the proponents of microlending even suggest that these loans could help to end poverty.
What Is It?
Microlending occurs when loans are made are small and/or are unconventionally secured, if at all. They are a means for people who could normally not receive credit to be able to obtain a loan. The idea is to spur entrepreneurship. Many people, often times women, in traditionally poor areas may come up with an idea for a business but may be unable to obtain financing. Originally starting in developing countries about 30 years ago, these loans were intended to build wealth and, with hope, end poverty. (Learn more about emerging markets in Evaluating Country Risk For International Investing.)
There are two types of microlenders: For-profit and not-for-profit. eBay's subsidiary, Microplace, is an example of a for-profit dealer. Those wanting to donate to an individual borrower can use their Paypal accounts to transfer money. Kiva, a well-known not-for-profit lending organization, doesn't receive any interest on its loans, but the field partners through which loans are managed do charge borrowers interest. Kiva has some interesting statistics regarding its loans:
|Total value of all loans made through Kiva:||$105,084,510|
|Number of Kiva Lenders:||601,646|
|Number of countries represented by Kiva Lenders:||188|
|Number of entrepreneurs that have received a loan through Kiva:||261,312|
|Number of loans that have been funded through Kiva:||149,794|
|Percentage of Kiva loans which have been made to women entrepreneurs:||82.55%|
|Number of Kiva Field Partners (microfinance institutions Kiva partners with):||106|
|Number of countries Kiva Field Partners are located in:||49|
|Current repayment rate (all partners):||98.04%|
|Average loan size (This is the average amount loaned to an individual Kiva Entrepreneur. Some loans - group loans - are divided between a group of borrowers.):||$402.88|
|Average total amount loaned per Kiva Lender (includes reloaned funds):||$174.98|
|Average number of loans per Kiva Lender:||5.03|
|Data as of 11/27/2009 from Kiva.org|
Kiva and other organizations advertise the appeal of lending being a safe investment and a socially conscious thing to do. Developing countries have many people who are in great need of assistance, and the hope is that by donating to these people, the economies of their countries will benefit.
These loans are not only being made available overseas. U.S. entrepreneurs can also take advantage of this financing. In fact, small and private businesses make up more than 87% of all businesses in the United States – accounting for 900,000 newly-created jobs every year. And funding for these companies often comes from lending firms.
It has been suggested that excessive interest rates have been charged in the microlending game. This is because there are no legal limits – and little government involvement – in this field.
Researchers at MIT recently have worked on two papers that suggested microlending may not be as impactful as originally hoped. The research found that many microcredit clients actually use the monies they receive through lending on household items – debt, car payments and luxury items – rather than the businesses for which it was designated.
Becoming a Microlender
One of the first decisions you must make is whether to donate interest-free or not. In addition to lending through third party organizations, you can also become a lender on your own. If you do so, it is important to confirm that your client is reputable and has the intention of abiding by timelines, late payment policies and interest rates, as it relates to repayment of the loan.
Microloans can become a valuable part of your charitable gift giving. Although these loans have no guarantee that they will be repaid – as is the case with any loan - you may be helping those in need as well as helping a depressed economy. Financial interest returns may be small or non-existent, but the money invested may be a charitable way to help out those in need.
For related reading, check out Microfinance Has Major Impact and Using Social Finance To Produce A Better World.