Friday, June 26, 2009

Micro Lending in Developing Countries

During my short time at a public relations agency that focused on nonprofit and mission-based organizations, I became aware of the term "micro-lending" and its effectiveness in developing countries. So, when I saw this article in the New York Times today, it caught my eye immediately. I'm not sure why I have never thought to write about this before, but it's never too late to do so.

Essentially micro-lending is the extension of very small loans meant for those in poverty to help cultivate business and entrepreneurship. This by no means is anything new and it has been the subject of many media outlets discussing the pros and cons of such a practice.

However, the article in the New York Times pointed out that while these loans can greatly help people, it is important to teach them business education. The combination of the loans and the knowledge is a more practical way to increase the amount of success people experience in stabilizing themselves financially and contributing to the rest of society.

While the story presented a couple of success stories, the major criticisms of micro-lending is that it can leave the small guy to be taken advantage of by big banks and it that there is no way to ensure that these loans are actually being used in the manners for which they were intended.

These are valid concerns and it's encouraging to see that organizations are working to improve the system., a micro-lending organization operated through the Internet, reassures lenders that these loans really are making a difference:
We are constantly working to make the system more transparent to show how money flows throughout the entire cycle, and what effect it has on the people and institutions lending it, borrowing it, and managing it along the way. To do this, we are using the power of the internet to facilitate one-to-one connections that were previously prohibitively expensive. Child sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individuals featured on our website are real people who need a loan and are waiting for socially-minded individuals like you to lend them money.
Other organizations such as WomensTrust, which is dedicated to helping the women of Pokuase, Ghana through micro enterprise, education and healthcare, also make sure to detail the process for lenders states on its Web site:
We employ a group-lending model that was introduced by the Grameen Bank in the 1980s. Potential clients form their own groups of four or five women and come to the WomensTrust office for an initial screening. In order to track impact, our staff records information about their businesses, their incomes, their families, their education, and their homes.

Once the group is accepted, each woman receives a beginning loan of $40 U.S. Each group member must repay her individual loan before the whole group is eligible for its next loan. We charge 15 percent interest for each four-month loan period. That rate is well within Ghanaian banking guidelines and is set purposely high to compensate microfinance institutions for the risk they are willing to assume making uncollateralized loans to the poor and very poor. It also discourages loan clients from gaming the money— i.e., loaning it out at higher rates to others.

Each of our loan clients is issued an individual ledger book with the date and details of her loan and weekly repayments. Once a group has successfully repaid their loan in full, they are eligible for the next loan of $60 or $80 and can progress up the scale to a maximum amount of $190.

There will always be kinks in any type of system which is why I think micro-lending can have more pros than cons. It needs to have checks and balances and people who are sincere and genuine in these efforts to help people.

On the other hand, for lenders, there is the issue of return on investment (ROI), leaving some to question if this type of philanthropy may focus too much on profit. This is perhaps a bit of an oxy-moron since the whole point of investing in something is to gain something back.

If a particular project isn't advancing, I'd be questioning why as an investor. Getting a better understanding of what the challenges are and what needs to be fixed is a more feasible solution than having investors pull out their support. This, ideally, is left to the organization but it is important to keep the lender as informed as possible. I figure if someone is already investing in a project aimed to help those in need, then it is most likely not all about ROI (maybe I'm being too optimistic but I'd like to think that this is how it goes) and he or she would be willing to stick it out--especially if steps are being taken to improve the small business.

These are clearly my observances as I can't claim to know the detailed process of exactly how the relationship between the lenders and organizations work. I understand it would take a lot of manpower, time and money from these organizations to maintain that level of transparency, but again, the process can evolve as time goes on.

Micro-lending can offer some promising endeavors. It's just a matter of whether we can perfect the system. For now, we know that it is doing good in many cases and I think that's justification enough to move forward.

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