Web 2.0 Microfinance Roundup

Microfinancing has been revolutionizing the way we help the poor. It is best laid out by the father of the concept, Muhammad Yunas (a Nobel Prize winner), in his book, A Banker To The Poor. In short, Muhammad Yunas established a bank (Grameen) in Bangladesh to help the extremely poor - those in the bottom 50% of an already impoverished nation. Lending them money in small amounts (tens to hundreds USD) with real interest rates (upwards of 15%), and making money for the community, lender, and most importantly, the bank. Microfinancing is not a charity, it's a for-profit business, and it works.

Many of us in the developed world have the stigma that the poor in both our own country and those around the world are stupid and unable to do anything for themselves. I think that's why we push hard for charities to throw money at problems that we want to solve. While this helps sometimes, a lot of the time it further entrenches the poor in their impoverished state since charity leaves the poor dependent on handouts.

Microfinancing and social entrepreneurship in general has taken another approach, in my opinion, a better approach, which is to take that leap of faith in the poor to trust that they have ideas on how to make money. It is from this basic notion of human respect that many, millions, of poor people around the world have been able to increase their standard of living. Microfinancing is a gift that keeps on giving.

I can go on and on with accolade, but in short, microfinancing works. Now, I'm a poor entrepreneur trying to make my way in the world, but I thought I'd offer some ways to get involved in this fantastic process from the comforts of your own home.

There are two major options online right now:

1. Kiva.org



Kiva is a nonprofit charity that allows donors to choose individuals to donate to. Each recipient gives a small description of what they are going to do with the money, and you can use PayPal to send money to Kiva which will then send the money to the local microfinance institution coordinating the transaction. They get about 100,000 unique visitors a month.

While the business model works as a nonprofit charity, it doesn't properly leverage the power of social entrepreneurialism. Without asking the poor to return the money with interest it doesn't give them the incentive to strive to break their own boundaries. Handouts belittle the intelligence and human worth of those in need of help.

Read/Write web had a good blog post on Kiva.

2. MicroPlace.com



MicroPlace is a for-profit subsidiary of eBay. It runs on the same concept as peer-to-peer lending. Investors get a return on investment with maturity dates ranging from 1 to 3 years. The return isn't huge, but they can guarantee 1-3%.

While admirable, these return rates need to be higher. Right now, investors still lose money with inflation adjusted. The bank by Muhammad Yunus has proven that upwards to 15% is the going rate of loans to the poor and at a default rate of less than 5% it seems to me that promising 4-5% is quite reasonable. This is important because by hitting the 4% mark you get to the same level as CDs and Money Market accounts which will make microfinancing a legitimate option for diversifying a portfolio, and that's where the real money is.

Aside from these minor points of contention, I'm sure both Kiva and MicroPlace are trying their best to change the world (which is a lot more than I can say for myself), and I wish them the best of luck. Please visit both sites when you get a chance.