Microfinance: Loans That Change Lives

If you feel you can’t make a difference in the world, you’re wrong. Microfinance provides banking services to the poor who normally can’t qualify. And helping the world’s poor this way costs you, relatively, pennies. These services usually involve such small amounts of money that traditional banking considers them inconsequential. But to people struggling to work out of poverty, any amount is significant.

In the 1970s, economics professor Muhammad Yunus began visiting the poorest women in Jobra, Bangladesh. He found they were able to borrow only from moneylenders at exorbitant interest. Without loans, the women could not buy the bamboo to make goods for market. After selling those goods and paying the high interest, the women had nothing left.

Yunus, who eventually created and popularized the modern idea of microfinance, began lending to the poor out of his own pocket and later founded the Grameen Bank. (In 2006, the Grameen Bank and Yunus won the Nobel Peace Prize for creating the simple yet revolutionary microcredit system.)

In 2003, Yunus spoke at Stanford Business School to an audience that included Matt Flannery and Jessica Jackley, who two years later co-founded the nonprofit lending organization Kiva (“unity” in Swahili).

Kiva helps alleviate poverty in developing countries – as well as materialism in developed nations – and works with carefully selected field partners in 76 countries to manage loans.

Once Kiva collects enough money for a loan, the funds go to the field partner. Over the course of the loan, entrepreneurs gradually repay the loan from profits. As repayment accumulates, the money flows back into a user’s account. Users then withdraw the funds or provide the money again to another entrepreneur.

Kiva holds the rates and practices of field partners accountable. If a partner charges too much or complains about lending practices, Kiva finds other partners. Users also hold field partners accountable to make honest loans to worthy borrowers. Kiva accounts are free. Over 1.1 million users are Kiva lenders, each averaging fewer than 20 loans, or about $479. The total value of loans through Kiva still exceeds $550 million.

Microfinance can’t solve all world poverty. A loan to buy, raise and then sell a calf makes sense in many parts of the world. But if you live where armed bandits steal your cow, microfinance doesn’t work. Nor does it work for families on the brink of starvation: Given the choice between feeding the calf and feeding her children, no mother preserves the investment in the calf.

The method makes the most sense for short-term loans for less than two years, where a little money can help grow the beginning of a good situation. Our first Kiva loan was to Jehiner, for instance, a 26-year-old living with his parents in Chiclayo, Peru. He drove a taxicab but needed $725 (2,000 Peruvian soles) to repair his cab.

Edpyme Alternativa, the field partner, lent Jehiner the money. Kiva backfilled that loan so Alternativa was able to make another loan elsewhere.

In about 10 days, Kiva found 29 users willing to pitch in $25 each. Jehiner had 14 months to repay. Because of the loan, he continued to earn his living.

Detailed personal stories help lenders see those needing capital in the developing world as real people with real needs. Microfinance sometimes does wonders but makes sense only for borrowers with some way to repay. It sure seems to work; Kiva’s repayment rate is 98.95 percent.

Processing microfinance is as expensive as big banking but profits are smaller. As a result, fees and interest are higher than those of traditional loans. Kiva tries to keep those costs down. Optional fees and donations help support the cost of running the nonprofit and nothing comes directly out of the loans.

You can get involved with microfinance in several ways. With as little as $25, you can begin lending money to entrepreneurs give a gift certificate to someone who might be interested.

Kiva’s website interface is intuitive and enjoyable. You can search by multiple criteria to target a specific type of loan, as well as search by gender, country, industry, popularity or timeliness. (You can also join our firm’s lending team.)

We all think a lot about how our money helps ourselves. A drop of your savings can help others simply live.

Follow AdviceIQ on Twitter at @adviceiq.

Written by David John Marotta, CFP, AIF. Marotta is president of Marotta Wealth Management Inc. of Charlottesville, Va., providing fee-only financial planning and wealth management at www.emarotta.com and blogging at www.marottaonmoney.com. Megan Russell is the firm’s system analyst. She is responsible for researching problems and challenges, and finding efficient solutions for them. Both the author and the clients he manages often invest in the investments mentioned in these articles.

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.