More than 10 years back I came to know about the micro lending organization Kiva.org designed to connect lenders and borrowers allover the world. You can signup getting an account, deposit some money, view a catalog of loan applications and lend as little as $25 at a time to people located in different countries to help them start really small businesses. A typical loan application could be from a woman in Azerbaijan or Nicaragua trying to buy a cow to start a milk vending business asking for $400. When a bunch of lenders like us loan small amounts (say $25 or $50 each) meeting the total loan amount, she gets the funds, runs the business and pays it back over ~6 months. When you get your money back, you can lend it again. The Kiva.org website provides a catalog of loan applicants with pictures/small write-ups to help you make a connection with the borrowers. I loved the idea and so placed few hundred dollars there and used the interface to get my kids exposed to notions like what kind of money can make which type of businesses possible around the world. My son/daughter will read through the requests and enthusiastically say let's lend $25 to this lady trying to start a business selling seeds in Vietnam. It was fun, educational and fulfilling. We have given out 100 loans now recycling the few hundred dollars into more than $4000 worth of loans. Once in a blue moon we lose some funds when loans default. But that is really rare since it happened only once or twice in the last ten+ years. We don't get any interest but do get recurring requests to donate to Kiva that can be ignored/obliged as you see fit.
I describe this Kiva.org model to friends now and then to get them interested. When I told about it to an Intel colleague, he got quite excited and so went and looked it up to sign up as a lender. But after reading up enough, he came back and told me that Kiva often charges interest rate as high as 40% and wondered aloud as to whether I am still sure that this is helpful to poor borrowers. Kiva itself has responded to such criticisms saying since they work with risky borrowers, and do need to support NGOs that do all the field work in the impoverished countries & societies they work, such high rates are justified. One thing that I pride myself is that I am not emotionally attached to any of my ideas. If/when convincing contrary evidence is presented, I rationally think about it and change my positions based on the evidence. So, taking the cue from my Intel colleague's nudge, I decided to do some serious reading to assess the efficacy of micro lending and ordered this book called Due Diligence by David Roodman. He is seen as a sincere, balanced critic that has put out unbiased reports and articles evaluating the MFIs (Micro Finance Institutions) allover the world.
Book starts off with an anecdote (promoted by MFI) pointing out how a poor woman used micro credits to dig her way out of poverty and gained self-esteem and respect from her family. It then pairs it off with the story of another woman who faced with real life difficulties that prevents her from paying back her monthly installments, ends up losing her house and cattle to pay her dues as she was forced to do so by her peers in the borrowing community. She swears never to borrow money for the rest of her life since it ruined her family. Such stories are powerful on both ends when selectively highlighted and so he steps back and starts off discussing various forms of credits/savings, groups that are formed to guarantee each other's debts, co-operative societies that help each other and many such phenomenons found throughout thousands of years of history all around the world. Subsequent chapters analyze dozens and dozens of micro lending institutions located in multiple continents (including many like Spandana, BASIX in India) in extensive details to conclude that there is no clear evidence that microlending has eliminated poverty. Author does say repeatedly that microlending certainly has value, just like regular lending, in the society. But it is not all that it is hyped up to be.
Roodman points out that when people are said to be living under $2 per day, their income varies widely day-to-day and so mechanisms that will even out the flow of money is valuable, including micro lending. But achieving that end via micro savings and even better via micro insurance programs will be far better. Normally it is hard for poor people to pay money to buy insurance since most of the time it will not give you anything back. So, they tend to look at it suspiciously. There are very nuanced discussions in the book about how being part of even a borrowing group can raise the status of a woman in her family as well as how it can suck up several hours of her time each week as she has to attend weekly meetings to remain part of the group to be able to avail the loans when needed. He goes to a lot of length to shine spotlights on Grameen-II that Muhammad Yunus (of Nobel fame) has developed that embraces savings as well as lending evolving as a better model, Indonesia's Government funded MFI that refused international aid since they wanted to maintain their own discipline of relying on members' savings to make lending possible (rather than lazily depending on foreign donors) and other varying models that work better (like allowing people to "top off" their loan by borrowing the money they paid off before fully paying back their loan (treating it more like a line of credit) that helps even out financial ups & downs and so on.
In the last chapter he concludes by saying that while we are still struggling to make well known bank like services work for the poor by making it micro & efficient, programs like M-PESA, implemented in Kenya by Safaricom telephone company that successfully handles more financial transactions than Western Union may actually provide the kind of inexpensive but very efficient solutions poor people really need. I am getting convinced that while it makes me feel good, lending via Kiva is not really helping people get out of poverty. Many Kiva loans are actually given first, even before their stories get posted on the website asking you to lend, which while being the correct/efficient process, is not truth in advertising. I am planning to pull out my remaining money and perhaps donate it more directly via GiveDirectly.org type organizations. PLMK your thoughts/views on microlending. If you are seriously interested in this topic, this book is certainly a good read.
