Microfinance agencies provide loans to small businesspeople who often can’t meet the strict credit terms of large banks. Either these entrepreneurs don’t have the capital or the cash to back the loan. Or as the large banks argue, their credit needs are too small.
With banks out of the picture, microlending agencies step into the role usually held by the imperfect combination of relatives and often predatory money lenders. Microlending is most often associated with the developing world, but agencies have begun working in industrialized countries.
The Grameen Bank, the world’s first microfinance institution, was born in Bangladesh in 1983 by Mohammed Yunus, an economics professor who launched it to help alleviate rural poverty by providing much needed funds to entrepreneurs to grow their businesses. Not only would the poor repay these loans, Yunus argued, but the Grameen Bank’s lending style would become a sound investment. In 2006, Yunus won the Nobel Peace Prize for his efforts. By 2008 Grameen Bank had lent $7.6 billion.
As the internet age hit, microlenders began looking for ways to replicate the Grameen Bank's success online. With the rise of social networking, especially peer-to-peer media, these lenders found their answer. The question, however, remains: Will social media help create a sustainable market for microfinance?
It’s just one of the debates occurring during a Sept. 23-24 Harvard University conference, Can technologies help reduce poverty in developing countries?
One of the first microlenders to have an impact over the internet is the US-based Kiva, which began a few years after a couple traveled to East Africa in 2004. Kiva claims to be the world’s first “person-to-person micro-lending website.”
Here’s a good description of how Kiva works, from Tales From Beyond the Glimpse, a blog from Austria.
In Kiva's website you can lend to someone across the globe who needs a loan for their business – like raising goats, selling vegetables at market or making bricks. Each loan has a picture of the entrepreneur, a description of their business and how they plan to use the loan so you know exactly how your money is being spent – and you get updates letting you know how the entrepreneur is going.
The best part is, when the entrepreneur pays back their loan you get your money back or use it for another loan (I like this idea because you can give a small loan once and use the same amount over and over)- and Kiva's loans are managed by microfinance institutions on the ground who have a lot of experience doing this, so I suppose you can trust that your money is being handled responsibly.
I made a loan to Adjo Solomé in Togo. I liked her immediately because she's working with a sewing machine!
I love the internet because you can do things like this directly now.
Kiva allows a potential lender to browse profiles of people needing finance. If a entrepreneur is selected and a loan made, Kiva then allocates the funds to one of its microfianance partners, an agency working on the ground. The recipient will then repay the loan, usually at interest. (The use of interest is controversial, but common, within microfinance.) Kiva's site allows lenders to follow the money throughout the loan process, keeping tabs on repayment and other personal updates. This has caught on to other lending sites.
What helps drives these sites isn't just the loans; it's the methods used to make the funds available. “Social networks are important,” writes Jon Camfield in his self-titled blog. “Trust — more commonly called social capital in this situation — is the strength and number of interpersonal connections. Facebook, Twitter, MySpace and the like are convenient ways to map out these connections (within a connected group of people), but hardly replace them.”
This is by no means new in development theory, and is often portrayed as either the keystone to successful development or a red herring (and to be fair, it's probably both).
Social Networks also provide a second important role. Beyond increasing trust to enable all sorts of transactions, and providing back-channels to smooth those along, they also improve (if not outright cause) technology diffusion. Spread throughout a network will be innovators, experimenters and early adopters who create, tweak and test new ideas, and then begin to spread them by word of mouth as well as through successful implementations.
The marriage of microlending and social media works two ways. First it allows a disparate group of people, perhaps the entrepreneurs, to communicate and become organized. Secondly, it allows them to reach out and relay their message with the larger world. Microlending organizations have latched on to this, leveraging technology to make sure potential lenders can put a face to recipients’ stories. Perhaps these personal bonds originate from the Grameen Bank, which began lending funds on the basis of trust and used peer pressure to insure the loans were repaid. Or, perhaps microlenders online use interpersonal connections as a bulwark against compassion fatigue.
Here’s an example of the personal touch from an interview in the blog China Philanthropy with Casey Wilson, the co-founder of Wokai, a microfinance site that has been called the Facebook for Farmers. Here Wilson relates a positive experience she's witnessed from microfinance.
On a micro level—one of my favorites is this woman from Sichuan who is 24 years old. When she was 18 she and her husband got married and were basically put into indentured servitude. His family put them in debt for living with them so they worked I the city for 4 years to pay off the debt and she was able to save up a little money when they moved back to Sichuan to start up a duck industry.
She bought a number of ducks. She started the business, and then 3 months in all of her ducks died. It turns out, at the same time she found out about our field partner. She went to them and got support and money to restart her duck business. I’m so impressed with her A—That she is so young and persevered through so much adversity and B—looking to see where she is with microfinance and where she would be without it. If our partner had not been there to help her she would have been left with nothing, her only options would have been to go back to the city, and she would never had the tools to lift herself from poverty. Stories like that are really inspiring to me.
The new French site Babyloan works on much the same manner as Kiva and Wokai, linking donors to entrepreneurs. But it is the first site to specifically target European donors.
It also has visions of building a social community. The Traveling Spouse, a blogger based mostly in France, reports:
Babyloan are hoping to develop the site into a social community, so that lenders can meet others and share experiences, even electing representatives to the board of directors.
By the reaction to this site, it has struck a chord with more than a few bloggers.
From Emmanuel Brunet, who lives and blogs in Paris.
Moi j'ai sélectionné Asfandiyor, Nishon, Gulchehra et Oygul, mes nouveaux amis du Tadjikistan.
Ils cherchaient 810 euros sur 9 mois pour acheter du bétail et ainsi produire du fromage, de la viande et probablement faciliter les activités agricoles. Dans 9 mois, ils nous remboursent les sommes données, sans taux d'intêret. C'est simple, ce n'est pas contraignant puisque l'argent n'est jamais perdu et ça donne un vrai coup de pouce.
L'argent remboursé pourra alors être injecté dans d'autres projets ou vous être rendu directement.
En quelques jours, les amis du Tadjikistan ont trouvé les 810 euros nécessaires à l'achat de bétail, grâce à d'autres participants de France et de Suisse.
C'est peut-être ça le développement (monétaire) durable… !
Within days, my friends from Tajikistan have found the necessary 810 euros for the purchase of cattle, thanks to other participants from France and Switzerland.
Perhaps this is (monetarily) sustainable development.
From the blog Les Enfants du Web.
L’intérêt est bien évidemment de suivre l’avancée du projet. Et on se dit qu’avec se genre de service notre argent arrive effectivement au destinataire…
J’ai donc décidé d’aider le projet de Chanthol Vorn, une cambodgienne qui veut développer sa petite épicerie ! Je contribue à hauteur de 20€ sur les 210€ nécessaire.
Je trouve le concept hyper intéressant mais le site en lui-même mériterait une interface un peu plus sympa. Que se soit au niveau des graphismes et de l’ergonomie, une version 2 n’est vraiment pas du luxe.
So I decided to help the project of Chanthol Vorn, a Cambodian who wants to expand her small grocery store! I contribute 20 € of the necessary 210 €.
I find the concept interesting but the website deserves a little nicer interface. Whether in terms of graphics and usability, version 2 is really not a luxury.
From Domi, who blogs at Mood-for:
Mmes Houessou et Gandaho veulent monter une petite boutique à Cotonou au Bénin pour nourrir leurs 4 enfants correctement. Elles ont déjà 340 euros sur les 460 dont elles ont besoin pour l’ouverture de la boutique. Je leur en ai prêté 30 et elles me le rendront dans 10 mois car, le saviez vous, les utilisateurs du micro-crédit remboursent mieux que la plupart des emprunteurs… Mes 30 euros, je pourrai ainsi les prêter à d’autres bientôt. C’est simple et efficace, c’est le micro-crédit à portée de chacun d’entre nous. Ca nous permet d’être utile.
The sites for Kiva, Wokai and Babyloan are full of functionality, great graphics and heart-warming photos. A participant in these projects cannot help but feeling part of a community. Interfaces also make sure the loan-making transparent. With all the technology supporting these sites, however, one blogger wonders whether these schemes will pass the sustainability test that often separates good development project from just good ideas.
David Costa, who blogs at Microfinance.fm out of Zürich, Switzerland:
my primary interest is looking at microfinance as an investment opportunity too and not as a donation.
Even in the case of Kiva the borrower has to pay interests but, at least, unless there is a default, the investor can re-use his capital or withdrawn it.
I am sure that donation and grants to not for profit institution like Wokai are important but from an investment standpoint these are not as scalable.
In the case of kiva there are more options: you can lend 4000$ and receive, if needed, part or all your investment back. In the case of wokai I can only donate
to their organisation – how they use the money is not really important from an investor standpoint. It is really not an investment.