This is going to be a 2-part post about microlending for the public. This part will be for a bit of a background on microlending, and the next segment will get into how I to do it and how I choose the recipients of my loans.
Microlending, invented by the Grameen Bank in Bangladesh, is exactly what it sounds like. Small amounts of credit, given to people of low income so that they can generate more income and get themselves out of poverty. Microfinance is a bit more than that – it usually includes credit, but also includes other banking and financial services to people who have smaller sums of money than would normally be accommodated by a bank. These services are usually provided directly by financial institutions, but thanks to a wonderful group called Kiva, every day Joes like you and me can get involved!
Ok, but first, why is it good to give loans instead of charity? Well, there are a bunch of reasons. But for me, I like that it gives the loan recipients the opportunity to design their own livelihoods. Sure it would be good to give someone a job, but unless they happen to love the job you give them, it’s not going to be a permanent solution. Letting someone create their own job also gives them the power to change that job in the future to meet their changing needs.
Moreover, what if the job you choose for them creates its own set of obstacles for the worker? Going to a factory might give a salary, but if there’s a baby at home, mom now needs to hire a babysitter out of that salary and buy formula out of that salary. And mom and baby get separated which, as an attachment parent doesn’t jive for me. But, if you let mom start her own business – maybe she can open a small shop at home – then she’s more likely to be able to earn money while meeting the needs of her baby.
But, can a very poor person handle debt? That’s a really important question. And as it turns out, the answer isn’t always yes. Responsible microlenders ensure that the loan will not cripple the recipient, but sadly not all microlenders are responsible. Also, lending in small amounts costs a lot of money, so the interest and fees charged on these loans can be quite a bit higher than we’re used to. It’s not unusual to see effective interest rates above 25%, and that’s a lot of money. How do you know when it’s too much? There’s really no straightforward answer.
An important thing to remember though is that microfinance encompasses more than just credit. The financier might make savings accounts available, health insurance, skills training and so forth. So the loan recipient can get a lot of benefits from their relationship with the lender that might make up for the expensive loan. It’s important to look at the whole picture.
Alright, I’m in. So um, what do I do? Stay tuned for the nuts of lending with Kiva and how I’m creating a March of Kindness with microlending!