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FEATURE ARTICLE - HOLIDAY 2009
How a $25 Loan Can Change the World
New online investing opportunities connect you with borrowers around the world who could use a hand up.
Every morning, Mary Clive
opens her Kiva.org homepage and sees the faces of 12 people, from countries such as Cambodia, Kenya, and the Philippines. Each of them wanted to break their cycle of poverty by starting or expanding a micro-business, but needed a small loan to do so. That’s where Clive, a Green America member who lives in Silver Spring, MD, comes in—last August, she invested $25 in each of these businesspeople, including a farmer who wants to buy a motorized hand-tiller and a motorbike taxi driver who wants to fix his bike. She has only been lending for a few months, but already she reports that this doesn’t feel like banking; it feels like building relationships. “It’s an investment in other people’s hopes and dreams,” she says. That’s the power of microlending.
“When a small business is successful, that can really have a life-changing effect for the family of a business owner,” says Fiona Ramsey, public relations director at Kiva. “Microfinance is about giving somebody a tool—financial services—so
they can create something sustainable long after your loan is repaid.”
Have you ever wanted to get involved in microlending but lacked the $1,000 or more it often takes to meet the minimum investment requirements for community development loan funds?
Kiva.org is one of a growing number of online sites that now allows you to participate directly in this type of community investing with gifts as low as $20–$25. These sites provide small, critical loans to low-income people from Ecuador to Lebanon to Idaho, who wouldn’t otherwise have access to capital. And as the holiday season approaches, investments like these make great gifts.
Small Loans, Big Impact
Community investing is a powerful socially responsible investment strategy that puts critical capital into the hands of low- and middle-income communities across the US and around the world that are underserved by mainstream financial institutions. It provides a hand up, not a hand out, that allows people in poverty to start small businesses, own homes, and attend college.
One powerful strategy for community investing, which was popularized by Nobel Peace Prize winner Muhammad Yunus through the work of the Grameen Bank m in Bangladesh, is microlending: providing very small loans to worthy entrepreneurs in developing communities. For example, a farmer in Peru might grow potatoes, but can’t afford a cart to carry them to the market to sell them. In many parts of the world, such a person might not be able to get even a small loan from a conventional bank—she might be regarded as “high-risk,” like many low-income people who have no credit history, no formal employment in the job sector, and no collateral to offer against a loan.
That’s where microlending can make all of the difference. Take Bayamma from India, who received three microloans with the help of Unitus, which worked with local microfinance institution SKS. She went from earning 32 cents a day to generating a stable income for her family, all with loans totaling less than $500. Bayamma used her first loan to buy a buffalo. After she made her loan repayments and bought feed for the buffalo, she still made more money selling its milk and dairy products than she did at her old job. Then, she received a second loan to buy another buffalo and a cart to transport sugar cane. She used her third loan to lease six acres of land to grow rice.
Her family now can afford healthy foods such as milk, vegetables, and rice, as opposed to their previous diet of mostly starch. Bayamma was also able to afford to get her son out of bonded labor.
Steve Schwartz, media director at Unitus, says Bayamma’s story is one that “gets repeated so many times when you survey the impact microfinance can have. It’s a really compelling story on a personal level, [and] we encourage that story to happen as many times as possible.”
Microfinance for Everyone
Thanks to the new generation of online microfinance sites, you don’t have to contact your financial advisor to become a microlender—all you need is your credit or debit card and $20–$25.
Kiva.org partners with 126 microlending institutions in the US, South America, Central America, Asia, eastern Europe, Africa, and the Middle East. You can choose the specific microentrepreneur to whom you want to lend and invest $25 or more. After a few months, your loans will start to be repaid in increments. In six months to one year, you’ll get your $25 back (or perhaps a little less because of inflation or currency exchange rates)—and any repaid loan money can be immediately lent again.
MicroPlace.com (which was purchased by eBay in 2006) enables you to invest $20 or more in microfinance institutions in Africa, Asia, Latin America, North America, the Middle East, and Samoa. With microplace.com, you can choose a modest interest rate—between one and six percent—and how long you’ll give your recipient to repay the loan—less than a year, between one and three years, or more than three years. Although you do not invest directly in a specific person’s business, you provide the essential funds that microfinance institutions need to give borrowers microloans. As with Kiva, you can choose to re-lend the money when it’s repaid to you.
Donation sites: Unitus, GlobalGiving.com, Jewish Funds for Justice’s 8thdegree.org, and ACCION.org all allow you to invest $25 or more in communities far away or close to home. For example, Jewish Funds for Justice’s 8th Degree Infinity Fund helps New Orleans businesspeople rebuild their enterprises in the wake of Hurricanes Katrina and Rita, while Unitus works with microfinance institutions in India, Southeast Asia, East Africa, South America, and Mexico.
The difference between these groups and sites like Kiva or Microplace is that your gift is a donation; the organizations will use your $25 to give microloans or help local microfinance institutions.
These donations are tax-deductible. GlobalGiving allows you to direct your microfinance donation to a particular community or country. The other Web sites will divvy up your donations among their microfinance partners.
Some of the new microfinance sites let you make your lending completely personal—not just to a particular community in a particular country, but to a particular individual. At Kiva and GlobalGiving, you can see a photograph of the person (or people) who will receive your loan or donation, and learn how the loan will help the recipient’s business, community, and quality of life improve.
“The pictures helped tremendously,” Clive says. “I felt a personal connection [with] the kind of person I might know, I might talk to.”
For instance, you might see a picture of Afivi, a Ugandan woman sitting at a sewing machine, and read about how a loan to purchase thread and sewing materials will help her expand her tailoring business. If you lend to a project, such as the construction of a school for children in Guatemala, then you may read that it will serve 50 students, will be the first high school in the area, and will bring educational opportunities to children living in poverty.
You can also search for loans by project type, separated by issue (i.e. disaster recovery, human rights, women’s empowerment) at GlobalGiving and MicroPlace, and business sector (i.e. agriculture, construction) at Kiva.
With Kiva and GlobalGiving, you can go online and see firsthand how “your” borrowers are doing in repaying their loans. Both sites have a feature that shows how much money has been raised toward a microloan. With Kiva, you can even watch as portions of the loans you made are repaid every month, and you get e-mails when borrowers update their Kiva journals, talking about their progress.
GlobalGiving posts online updates “from the field,” so instead of just investing your money and never seeing what happens to it, you can witness your loan doing good in the world. It’s easy to feel connected to people who need to borrow a little bit to get their businesses going— after all, most of us borrow money to get ahead in life, like when getting a loan for college or for a house, says Ramsey. “Borrowing money is a way that you can advance yourself, and what microfinance is trying to do is let [other] people have that same opportunity to advance themselves,” she says.
You might be asking yourself, “If traditional banks think people in poverty are too risky to lend to, isn’t microlending to these same communities a risky investment for me?”
Microloans typically are lent by an institution that establishes repayment terms tailored to the recipient’s capacity to repay. Microcredit institutions also often provide education opportunities to ensure that the loans and the microbusinesses themselves succeed.
Any investment carries some risk, but microloans have around a two percent default rate, in contrast to a 30 percent default rate for US sub-prime mortgage loans, according to the Wall Street Journal. As the global economic meltdown has demonstrated very dramatically over the past year, impersonal lending can be a lot riskier than personalized lending.
The minimum investments of these Web sites are small amounts to put on the table, so the risk is minimal. You can also read the biographies of the borrowers, and lend to someone who already has a good track record, or lend to someone in a solidarity lending group, where all group members are responsible for each member’s loans.
“When you invest, you expect to get something back,” Clive says. With this investment, she says, you also know “that you made a difference in someone else’s life. It’s an investment that grows in your heart.”
—Cathy Wilson and Joelle Novey
Green America and the Social Investment Forum are calling on investors to put at least one percent of their portfolios in community investments, which would put billions of additional dollars to work fighting poverty around the world. In addition to microlending, here are other options:
• Open a checking, savings, CD, or money market account in a community bank or credit union. Your accounts are federally insured, and your money will help lift up those in need.
• Community development loan funds are uninsured investments that help community development organizations around the world grant loans to low-income people. You can usually choose a return of zero to four percent, and your money is generally tied up for one to three years.
• High-networth investors can also participate in community development venture capital.
For more on these types of investments, including specific vehicles in which to invest, visit our Web site, www.communityinvest.org.