Microlending: Earn Money while Ending Poverty
My introduction to microfinance was during my visit to India about two years ago. I heard that a banking institution was loaning low-income households and businesses amounts that ranged from $50-$500 to be paid back at 3% per year over 3 years.
My first thought was that the default rate, or unlikelihood of paying back the loan, must be fairly high. That’s when I had a rude awakening. I didn’t understand the culture. Entrepreneurs in emerging economies weren’t looking for handouts. They’ve never had the opportunity to apply for a loan. These are people that have rigorous work ethic as craftsman, artists, and tradesman who couldn’t make the move from apprentice to business owner because of their economic status.
Now don’t get me wrong, I’ve never worn a save the pandas T-shirt in my life. The idea of charity never sits well with me either. I guess that old Chinese “teach a man to fish” proverb has always been tugging at my logic. The best part of microlending is that these people have already been taught, your just the means knocking at their doorstep.
Here are some stats from CREDIT Cambodia: Borrower repayment rate: 98%, Total loan portfolio: $7,469,076, Average loan balance: $522, Operational self-sufficiency: 147%.
If you’re impressed you’re not the only one. eBay recently took notice and began their Internet investment service, MicroPlace. Their mission is to help alleviate global poverty by enabling everyday people to make investments in the world’s working poor. Similar organizations include Kiva and Globefunder.
When it comes right down to it I would much rather loan $100 to an aspiring businessman or woman in Mumbai than calling a late night hotline hosted by Sally Struthers. It’s all that talk about making an investment in someones life. I’m glad some organizations finally took it to heart.
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Drew Smith said
am October 27 2007 @ 9:18 am
I, unfortunately, have no disposable or investable income at this moment. I do keep abreast, however, of the financial markets and potential investment opportunities, if only for the joy of being finance-savvy. These websites are similar to the idea of being a lender/borrower with and through your peers instead of banks and creditors. I suggest checking out the websites below. They’re the tools of modern usury, if you’re willing to accept the highest risk of defaulting. Even at safe levels (AAA), you stand to make a little money on modest loans.
A bartender at my work had an interesting idea, one that doesn’t appeal to me, the college student, but an interesting idea none-the-less. He pointed out that one could take a cash advance on a credit card, at whatever ridiculous rate you pay, and then reloan that money out at a more ridiculous rate. The result is lending money that doesn’t technically belong to you, and making money on it! This is known as arbitrage, and is as old as greed. If you can swallow a bit of risk, you stand to make a substantial amount of money doing a whole lot of nothing.
p.s. for those who checked their political compass from Jerad’s last blog; I got a kick out of the question asking whether or not it was ok for people to get rich by manipulating money. In my humble opinion, manipulating money is the only way to get rich. Unless you exploit yourself, you’re only going to build wealth by exploiting others (to some degree).
Some good sites, www.prosper.com and www.lendingstats.com.
Jerad Kaliher said
am October 27 2007 @ 11:40 am
@Drew Smith, those are really great references. Up until this point I wasn’t aware that there was a way to play as a virtual loan shark online. They keep it fair and in line with the amount of return you would expect too. Those stats make the offer look enticing, 20%-30% ROI’s for some of the top dogs! That kills all of the money managers out there trying to beat the S&P.
It’s funny that you mention that about taking money out on credit cards. There was a post on slickdeals a while back that encouraged you to take out a cash advance for the full amount, usually $10k, and invest it in a 6-month CD. At the time rates were as high as 4.5%. A sure thing at $450 per card. A few guys took it to the extreme and made close to $10k just juggling the cards around. I couldn’t even imagine using one of the sites you listed - the returns would be ridiculous when the funds are diversified - even with the default rate.
Of course, loaning small amounts of money to people in developing countries isn’t going to get you rich anytime soon. The 3% you get back barley covers inflation. The idea is that your giving to someone who is going to make actively try hard to make a difference in their own lives. It’s such a huge departure from just throwing money to the wind and hoping it gets to the right people.
The political compass is a trip. The statements are pretty radical and they have to be to make an evaluation. People that respond no to the idea of manipulating money to get rich most likely tend to fall along the socialist side of the spectrum.
Great info Drew, keep it coming!
Zath said
am October 28 2007 @ 2:11 am
I really like this concept, obviously you’re not going to throw all your cash at this, but it’s a great option in terms of investing a percentage of your cash that’d you’d normally put into savings etc.
This is a really good opportunity for people to make a difference rather than like you say, throwing money in the general directions of these countries and just hoping it makes a difference, very good karma indeed!
Jerad Kaliher said
am October 28 2007 @ 6:00 am
@Zath, when it comes down to the semantics the idea just makes since to me. I’m not even sure this could be considered investment, because at most your just getting your money back + inflation. It’s more like a proposition to help people get on their feet and out of their bad situation. I’m just glad such a radically innovative way of looking at banking has made it this far.
Connie T. said
am October 28 2007 @ 8:12 am
Capitalistic means towards socialist ends? What a great incentive to invest. Sign me up, I’d be happy to be a microfinancier. Its not just an investment into one person’s life, its good for all of society as a whole.
As for lending off credit card borrowings: scary but cool. I wish I was less afraid to take risks, but the idea of enslaving myself to a credit card company by being in debt is pretty intimidating, especially if Joe Schmoe doesn’t pay me back.
But, what the heck, you’ve got to be in it to win it.
Jerad Kaliher said
am October 28 2007 @ 5:07 pm
@Connie T., I would pay money to see this topic debated by Milton Friedman and Noam Chomsky. I’ve always been a capitalist at heart and I’ve never seen the value in giving away anything.
Lending debt to debt is scary at the micro level. In fact, I don’t recommend it unless you want to become the financial equivalent of an extreme sports junkie. Countries play this game all day with bonds and currency. It might hit a little closer to home when your moving $30k rather than $30 billion.
Jay Ehret said
am October 29 2007 @ 8:14 pm
Hey Jerad,
I’ve seen microcredit in action on mission trips to both India and Bangladesh. Based on the models I have seen, it is not a surprise there is a low default rate.
First, the microcredits I have been exposed to deal only with women. Men will simply not pay the money back as dependably as women. Second, the women must make some deposits into the microcredit for several months before they are allowed to get a loan. Third, the women must be part of a group and have several co-signers to guarantee the loan. Fourth, the women must take classes and learn about finances before receiving a loan.
Granted, my exposure to microcredit has been only through Christian organizations. Probably not all operations are run like this. But imagine if Americans had to go through this same process in order to get a loan. What would be our loan default rate?
Jerad Kaliher said
am October 29 2007 @ 9:20 pm
@Jay, actual default rates are pretty low across the board in the US (about 5%). It’s the late pays that range in the 30% range for some credit tiers (C- to D).
That’s really interesting information, thank you for sharing. I had no idea that they needed to make deposits for months before they are allowed to take out a loan. And taking classes on personal finance, how ingenious!
The system of banking in the US (mainly credit cards and I’m also taking a stab at the mortgage industry pre-reform) is mainly predatory. Their best customers are the misinformed. They make late payments and take 30 years to pay off a measly balance with minimum payments. It almost makes you wonder. What if it was mandatory to go through finance courses in school at a young age? Would it make a difference?
lordmanilastone said
am October 30 2007 @ 9:56 am
i don’t know much about the complexity of financial and economical issues, all i know is that the idea is really a smart way to alleviate the condition of the poor, i know poor people just like in my country have lots of good and creative business ideas but they don’t have the capital…^^
Jerad Kaliher said
am October 30 2007 @ 11:03 pm
@lordmanilastone, when push comes to shove it is just a great idea to fund inspiring entrepreneurs. I almost feel ashamed because I was so skeptical when first introduced to the idea. It helps chalk one more up for my humility.
sembatya nabeel said
am February 6 2008 @ 2:08 am
keep up t records
Ravishankar said
am April 10 2009 @ 4:08 am
I am following the financial markets and i am looking for a loan to consolidate my debt market.Kindly is there any one who can help.I promise to repay the amount in installment.
Ravi