The Revelationist
Simplicity is the ultimate sophistication.
September’s Featured Microfinance Advocate: Kiva
Sep 1st
September is finally here, and how best to start off the month than with another microfinance organization?
This month’s featured microfinance advocate is Kiva, a web-based microfinance organization that serves as a platform to connect lenders with Field Partners (MFIs) and entrepreneurs. Since its founding by Matt Flannery and Jessica Jackley in November 2005, the organization has lent a total of $156,398,250.
With Field Partners in 59 countries, Kiva’s hand of influence stretches across the globe helping millions of borrowers everyday. Kiva is a user-friendly site that allows lenders to touch business owners across the globe with just the simple click of a button. All that lenders have to do is register with an email, integrate their PayPal into their profile, and then choose a entrepreneur to invest in. From there, lenders can check up on their borrowers from time to time, with the ability to see how much they have repaid.
Although I have yet to make my first loan through Kiva, friends and family that connect through the program to entrepreneurs around the globe tell me that the experience is one of a kind. With over 1 million connected through the organization, Kiva is making a difference that will change the world!
The Socioeconomic Effect of Microfinance
Aug 30th
Never before have two conditions existed:
The ability for millions to communicate instantly with one another over vast distances.
Relatively easy access to credit institutions.
Microfinance, a new financial institution, is changing the way the world approaches lending to the poor. Servicing the most disadvantaged business owners for the past 20 years, microfinance has opened a new dimension to those entrepreneurs originally unable to rise from the depths of poverty. An analysis of the socioeconomic development of underdeveloped nations reveals that the influence that this institution is effecting on developing countries is not only changing the way that credit institutions approach lending to the poor, but the future world of the modern man.
The Beginnings of Banking
Financial institutions, a product of urban society, has so enveloped the masses of today, it is hard to imagine a world without them. Before organized civilization, life was dealt with by what people had on hand; no loans, no credit. Eventually, lending integrated into churches and religious communes to help small business owners develop their businesses. From there the movement gained popularity once it moved industrialized Europe where it lent to borrowers at high rates. Those practices soon crossed the Atlantic to North America where, ever since then, the banking sector has seen massive expansion.
Socioeconomic Influence
Because of this consistent pattern of expansion throughout the most urbanized and populated states, credit has become a necessity to the success of most businesses. These financial institutions are responsible for the foundational agriculture and technology industries that have seen exponential expansion since the beginning of urbanized society.
Despite the banking system’s integral part in society’s development, the common trend that the industry has followed can be summed up in two simple rules:
The principles that have thus dictated the development of culture and business are closely aligned with the saying, “the rich become richer, and the poor become poorer.”
Enter Microfinance
From the beginning, microfinance has opposed this trend. Where originally this idea of “giving back” to the poor through small, low-interest loans wouldn’t have been either sound or sustainable in a world where communication technology and developed infrastructure would be insufficient to support such a globally involved effort, with the help of the internet and mobile phone, connecting and empowering others has become much easier.
An example is Bangladesh, the country where microfinance was first introduced. A country plagued by poverty (whose population is nearly 50% beneath the poverty level), microfinance’s introduction during the late 1990′s has placed Bangladesh among the few countries on track to meet the millennium goals of 2000.
Target 1A: Halve the proportion of people living on less than $1 a day
- Proportion of population below $1 per day (PPP values)
- Poverty gap ratio [incidence x depth of poverty]
- Share of poorest quintile in national consumption
Conclusion
So what is in store for the future of the banking industry, poor business owners, and the world?
I believe that microfinance is furthering the “theory of progress”, and ultimately equalizing the opportunities and benefits of all people. Microfinance is enacting large changes that are reversing the major trends that have existed for more than 2000 years. It will be interesting to see how major industrial nations, along with politically unstable countries react to the integration of this new institution.
Opinion
Where do you think microfinance is taking the world?
Why Are Microfinance Interest Rates So High?
Aug 16th
The nature of microfinance is such that interest rates need to remain high in order to repay the cost of the loan and cover operating costs.
When making a microloan, a microfinance organization (MFI) has to consider three different types of costs:
- operating costs
- default costs
- transaction costs
For example, if the operating cost of an MFI for each loan is 10% and it experiences defaults on 2% of its loans, then these two costs will total $12 for a loan of $100, $60 for a loan of $500, and $120 for a loan of $1000. An interest rate of 12% thus covers both operating costs and default costs.
However, the third type of cost, transaction cost, is not proportional to the amount of the loan. The transaction cost for the $100 loan, the $500 loan, and the $1000 loan are not much different. All three loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing loan disbursement and repayments, as well as follow-up meetings. Suppose that the transaction cost is $20 per loan and that all three loans are for 12 months.
To break even on the $100 loan, an MFI would need to collect interest of 10 + 2 + 20 = $32, which represents an annual interest rate of 32%.
To break even on the $500 loan, an MFI would need to collect interest of 50 + 10 + 20 = $80, which represents an annual interest rate of 16%.
To break even on the $1000 loan, an MFI would need to collect interest of 100 + 20 + 20 = $140, which represents an annual interest rate of 14%.
At first glance, these extremely high interest rates seem abusive to some people, especially because the borrowers are poor. However, the above models simply reaffirm the reality that when loan sizes become very small, interest rates remain high because the three aforementioned costs cannot be cut below certain minimums.
5 Tenets for American Microfinance
Aug 9th
Growing up in Orange County, California as a seventeen-year-old high school student, I have been fortunate enough to avoid the extreme cases of debt, lack of food, water or shelter which affect a large percentage of the world today. Introduced to microfinance by a teacher at my school, I soon recognized the potential which such a system holds to combat poverty.
While I do believe that helping business owners in developing nations will help to balance the financial inequality experienced throughout the world, microfinance in the United States deserves equal attention, with the current economic times making it harder than ever for businesses and individuals to qualify for loans. Motivated to make a difference, I hope to reach out to my fellow teenagers to help spread the word about the power of microfinance.
I’ve read everything about microfinance which I can get my hands on, and came across Muhammad Yunus’s “16 Decisions.” I found them to be powerful messages for entrepreneurs in developing countries to move towards better social and economic environments. Yet I believe that in an environment where access to technology, transportation, education and safety are less significant concerns, business owners in developed nations must have their own personalized guidelines.
I gave some thought to the “16 decisions” of Muhammad Yunus and felt inspired to write a few more guidelines which would be well-suited for U.S. microfinance.
Here are my “5 tenets” for U.S. entrepreneurs:
To demonstrate independence, ambition, innovation and creativity in all aspects of life.
To work within our means while also looking for economic opportunities in both local and foreign markets.
To maintain a healthy social lifestyle to foster an ideal learning environment in which all family members can succeed in their own endeavors.
To be economical in all aspects, making sure to place the welfare of family and business before oneself.
To never take on more responsibility than can be managed, and to immediately confront issues concerning debt, education and living expenses.
Exposed to the change enacted by ACCION USA, I found such an MFI to be the logical organization to contact in my search for ways to influence my own community. While the need for microfinance in Orange County may be less prevalent than other communities, by working alongside such an organization like ACCION USA, I hope to influence the lives of others in order to help business owners help themselves. As an advocate of microfinance, the opportunity which ACCION USA gives to local entrepreneurs is the progressive investment strategy by which the world needs to effectively combat poverty.
August’s featured Microfinance Institution: ACCION USA
Aug 1st
This week’s featured Microfinance Institution: ACCION USA
Officially the first MFI to be featured on The Revelationist, and widely renowned for its strides made in domestic microfinance, ACCION USA is an American based microfinance institution driven to help business owners help themselves. First established in Brooklyn, New York in 1991, the organization now offers loans between $500 and $50,000 to small business owners nationwide.
As an extension of ACCION International, ACCION USA’s purpose is to bring microfinance to the United States. ACCION USA’s accomplishments within the last two decades include a loan portfolio of $119 million, with borrowers located near its offices in New York, Miami, Atlanta, and Boston, as well as borrowers nationwide through its online lending application. The organization has also engaged in partnerships with commercial banks and other organizations such as Kiva.org, Sam Adams, and Tory Burch.
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The Future of Microfinance Interest Rates
Jun 17th
In a world powered by money, even the most altruistic actions come at a price. Although the intentions of MFI’s are good, a constant problem found at the core of all institutions is the issue of interest rates. To best understand how to handle such a delicate aspect of the microfinance process, one must first understand both sides of the argument.
The Hype
Since its creation, microfinance has met opposition on the front of interest rates from a vast array of poverty fighters. Essentially, the argument against having interest rates can be summed up in three points.
- Detrimental to Borrowers – By imposing interest rates on borrowers, lenders are changing the emphasis of borrowers by focusing them on how best to repay a loan instead of how best to improve their businesses.
- A Deterrent – Interest rates may also act as an intimidation factor, causing many business owners to opt out of borrowing at all merely to avoid accumulating debt or having to lose collateral material.
- Against Charitable Values – Charging interest on money dedicated to help alleviate poverty is wrong. By charging interest, MFI’s are trying to make money off of those who can barely support themselves to begin with.
Muhammad Yunus’s 16 Decisions
May 4th
During the 1980s, Muhammad Yunus created the single most uniting set of rules which microfinance has ever been introduced to. Called the “Sixteen Decisions”, this list of demands worked to establish a set of “social and personal commitments”, as put forth by his book, “Creating a World Without Poverty”. Not only has this list of goals worked to set forth a standard by which banks and borrowers can follow, but it has also established a set of morals and principles which can help the world of microfinance to create a brotherhood-like society, unlike anything the world has ever experienced.
Introduced to every member, the list hopes to bind each individual to a code of honor and aspirations.
The Sixteen Decisions:
1. The four principles of Grameen Bank – Discipline, Unity, Courage, and Hard Work – we shall follow and advance in all walks of our lives.
Desperate times call for desperate measures; this strategy is the exact opposite of which humans should resort to. As the first decision of the microfinance standard, Yunus grounds his followers, making sure to convey to borrowers that grasping for the impossible only leads to one’s destruction. Lightly put, while pursuing enormous goals, one cannot merely make a life-changing decision and fix everything. Small steps set the foundation for big change.
Levels of Response
Apr 25th
From government threat levels to levels of disciplinary action, levels of response are employed everywhere in order to demonstrate control, and a sense of restraint and caution. From the birth of the microfinance idea, the method through which a majority of institutions have acted is a “one glove fits all” response. In order to better coordinate with a community’s overall economic situation, microfinance institutions must employ their own levels of response.
Late in the 1960′s, President Kennedy enforced his own interpretation of levels of response to the war in Vietnam. His plan allocated funds to “develop an array of military ‘options’ which could be precisely matched to the gravity of the crisis at hand.’” Although the U.S. ultimately lost the war to Vietnam, microfinance institutions must employ their own form of flexible response to the economic situation of borrowers throughout the world. With strikingly similar approaches of aid to the regions of Haiti and Chile, two nations recently affected by catastrophic natural disasters, the rate of growth within the countries has remained relatively constant as compared to the economic growth within third world countries in Europe, Asia and Africa, thus invalidating the hyped efficiency of microfinance on struggling communities.
Are Interest Rates Immoral?
Apr 19th
While some have been convinced that microfinance can help to better society, many condemn microfinance supporters for their advocation of interest rates. A common misconception which deters many from investing in microfinance institutions is that loaners charge high interests rates on their borrowers, looking to yield a profit from the poor. The fact is lenders do charge their borrowers interest rates, but the motives for maintaining these financial obligations to the poor are for very different reasons.
Kiva, a prevalent web-based microfinance organization, is one of the many MFI’s which employs interest rates. Charging only 10-15% on each loan, much of the money returned goes to finance:
• new buildings in different locations
• pay employees
• expand capital base for loans
But these are not the only reasons for interest rates. At the heart of the interest rate problem, lies the intrinsic value of imposing financial obligations on rural borrowers. While it may seem harsh and inhumane, interest rates provide borrowers with an incentive to expand their businesses in order to pay back their loans.
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