Micro Finance Goes Digital

The concept of providing no collateral loans to the poor so they can work their way out of poverty.


When lawyer Aarthi Belani planned her Minneapolis wedding last year, she blended the traditional with contemporary. The multicultural ceremony, jazz-fusion ladies’ sangeet, and even her gift registry all had a modern twist. Guests who logged on to her online gift registry site, however, did not shop for gifts. Instead, the registry she created at the “I Do” foundation allowed them to donate money to her favorite charities, such as online microfinance initiatives. “We just felt like we had enough already with what we had,” Belani says, adding that the money could “make a bigger contribution to someone’s life abroad than a new kitchen gadget would make in mine.”

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Few theories in recent years have been as transformative as microfinance. The concept of providing no collateral loans to the poor so that they can work their way out of poverty, rather than relying on charity or predatory lending, is the brainchild of Prof. Muhummad Yunus, founder of Grameen Bank, for which he was awarded the 2006 Nobel Peace Prize. Grameen first loaned $27 to 42 craftsmen in 1974 and has since provided $6 billion in loans to 7 million borrowers. Its pioneering microcredit programs have been adopted in 100 countries worldwide, and this form of social lending is now coming to the Web.

Kiva is one such online program in which some 56,000 donors provided more than $5 million in loans to 7,600 entrepreneurs in the first four months of this year alone. Kiva, which is Swahili for unity, directly connects borrowers to lenders. The innovative model lets donors choose the individual entrepreneur they wish to sponsor by making a direct payment through Paypal on the internet. Kiva solicits entrepreneurs and relies on hreferrals from the tight-knit development community. During the rigorous due diligence process, a Kiva “Field Partner,” or local microfinance institution, initially screens the loan recipient and conducts routine audits. Kiva sends loans to the Field Partner and loan repayments are made directly to the lender. Thus far, Kiva claims a 100% loan repayment rate, though this will likely fall to the industry average.

Seema Patel, a lawyer in Baltimore, has loaned through Kiva since its inception and regards herself as one of the group’s biggest fans. She has a long-standing interest in microfinance. After graduating from college, she moved to Ahmedebad, Gujarat, to work for the Self-Employed Women’s Association (SEWA), a prominent women’s microfinance institution in India. She says that, “like many first-generation Indian Americans myself who grew up in this country but retain such deep roots to our motherlands there is still a desire to give ‘give back.'” But she acknowledges that not everyone can afford or necessarily desire taking years off of their careers to work in foreign countries. The solution for Seema is Kiva. “By just using your blackberry or PDA, Kiva enables people who want to make a difference to effectuate societal change by drumming to the beat of an age-old adage: give a person a fish, you have fed her for today; teach her how to fish, you have fed her for a lifetime” 

Kiva’s President Premal Shah has a background of both corporate and public interest work similar to many of the organization’s lenders like Patel. He is a veteran of Paypal and has human rights experience in Ahmedebad, Gujarat. Although none of Kiva’s field partners are currently in India, Shah is determined to bring Kiva to the subcontinent. Shah says that its microcredit model is currently prohibited by the Reserve Bank of India’s guidelines regarding the repatriation of funds.  “We are on the verge of entering India, and I anticipate that sometime this summer we will be in the country,” he says.  Part of Kiva’s desire to create a presence in India comes from the keen interest of many South Asians that are part of Kiva’s network. “I don’t know if it is because Kiva uses technology, or because there are many entrepreneurial Indian Americans, but a lot of our fundraisers have a disproportionately high attendance of Indian Americans,” Shah says.

Meanwhile, many countries reap the benefits of Kiva’s groundbreaking model, including Azerbaijan, Moldova, Bulgaria, and Honduras. Two groups contribute most to Kiva. One is the 20-something Silicon Valley types who want to do good with their money.  The others are over 50 years old and generally not tech-savvy, according to Shah. This group “might not even be proficient at putting their credit card information online, so they will ask us if they can mail a check instead,” he says.

Most of Kiva’s participants are like Shah himself. “There has always been this need among my friends including me to do something good. I’m lucky to be able to do the intersection of what I love and what I do well, which is Kiva.”

Part of Kiva’s allure is the ability to reuse money once a loan is paid back to help another person in need. For those interested in making a donation instead of a loan, however, Global Giving is a similar alternative. Founded by two ex-World Bank executives, Global Giving accepts donations online through paypal as well as traditional checks for a wide variety of programs it supports worldwide. Donors can search for fund recipients by region as well as by theme. For example, donors interested in supporting field partners in environment, gender, or education initiatives can search for programs they wish to fund directly.

Of 63 countries supported last year by Global Giving, India is the most popular. To date, the program’s 126 projects in India collected the most money from the greatest number of donors of all Global Giving’s programs, disbursing over $1.1 million from 2,000 unique donors.

Meredith Landis, marketing associate of Global Giving, says that the program does not restrict the projects it funds either thematically or geographically. Rather, by sponsoring a diverse range of projects, Meredith says that donors are able to browse and find projects that appeal to them. “Donors can even contact Global Giving directly if they have a specific interest in mind, and we will work with them to find a project that matches their interest,” she says.

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In contrast to Global Giving’s strong presence in India, Grameen currently has only six projects in India, though Julie Peachey, regional director of Grameen Foundation’s Asia Programs, says several partners will be added in 2007. Grameen targets specific partnership organizations. “The overarching interest in selecting partners in India is finding organizations that serve the poorest of the poor,” Peachey says. “Geography plays a role in isolating pockets of abject poverty.”  She notes that South India is well-served while North and Northeastern India, where many hard-to-reach tribal groups live, are not.  Sustainability is a major factor in selecting Grameen’s partners. “The groups we pick may not already be self-sufficient in terms of their own resources, but they have a clear path for getting there,” Peachey says.

Kiva’s and Global Giving’s platforms encourage transparency for donors by allowing them to see exactly who receives their money and for what purpose. The programs also maximize the money’s potential by directly sending funds to their destinations, though Global Giving, which describes itself as the “eBay of international philanthropy” takes 10% of each donation for its operating costs.

Global Giving offers online gift registries and gift cards. A particular advantage of online microfinance projects like Kiva and Global Giving is that donors can earmark their funds for specific projects, which is currently not possible with Grameen, for example.

Whether online or on the ground, microfinance operations are not without criticism. The state government of Andhra Pradesh, for example, shut down a Grameen Bank operation in 2006 following complaints of exhorbitant interest rates, although the branches were soon reopened, without admission of any wrongdoing, according to the Grameen Foundation.

Yet as the brief history of Kiva and Global Giving attest, and Grameen’s overwhelming success in lifting 50 million borrowers out of poverty corroborates, microfinance’s impact is hard to attack. As the Nobel Committee noted, “across cultures and civilizations, microfinance has shown that even the poorest of the poor can work to bring about their own development.”

 Making Sense of Microfinance

Microcredit organizations provide financial services, including loans and savings accounts, to the poor.  As the vast majority of the poor in developing countries do not own assets to borrow against, they do not qualify for traditional credit and loans from the “formal” banking system. So they turn to “informal” loan sharks who charge exorbitant interest rates. The inability to pay back these “predatory” loans often condemns the poor to a cycle of poverty.

The unique feature of microcredit is that loans are provided without collateral or legal contract. It rejects the notion that the poor are inherently “uncredit-worthy.” For example, most loans are disbursed through not-for-profit institutions that generally tag the interest rate of the loan to the market rate of commercial banks. Loans are paid back on an installment basis. Once fully repaid, borrowers qualify for another loan. Strikingly, borrowers rarely default: the average repayment rate for microfinance loans industry-wide is near 96%.

Microfinance’s success comes from helping groups, like craftsmen. Because women worldwide are least likely to have access to capital, many groups specifically target them. For example, 97% of Grameen’s current nearly 7 million borrowers are women. Online models like Kiva, however, have a harder time soliciting women to participate in their online programs, partly because some women fear exposure on the internet.

Microfinance’s mission is not only economic, but also social empowerment. Many groups require borrowers to join a community association of borrowers. For example, some models create self-monitoring groups that coach each other on financial skills, such as repayment and work skills. To participate, the group must adhere to several principles, ranging from a commitment to keep family sizes small to a vow against accepting or giving dowry during marriage.  These grass-roots associations have even banded together to create student loan programs and vaccination programs.

The Faces of Those in Need

Sobi Begum’s life once mirrored that of countless South Asian women confined to abject poverty. Living on the equivalent of less than $1 per day, Begum picked water lilies from a nearby pond to gather their seeds to serve with rice for her children’s dinner. Malnourished and uneducated, her children seemed condemned to a life no different than Begum’s own.

$35 loaned to her in 1981, when the Grameen Bank started informal operations in Tangail, Bangladesh, changed Begum’s life. Not only was she able to buy a cow and grain, she was encouraged to train as a veterinary assistant. Successful repayment of her first loan led to others, and with each Begum transformed her family’s life. Begum achieved the unimaginable for many of South Asia’s poor: provide food and consistent schooling for her children, as well as own her own home and business.



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