When Muhammad Yunus, founder of Grameen Bank, which revolutionized
credit for the poor, won the 2006 Nobel Peace Prize, microfinance
became a household concept. Now, online lending sites such as Kiva and NamasteDirect
give everyone a chance to help fight global poverty and, in the words
of one new investor, "teach people how to take a small investment, grow
their business, and eventually become self-sufficient."
Kiva offers investment options that appear to revolutionize the
interface between giver and receiver, lender and client. According to
Jonathan Morduch, coauthor of "The Economics of Microfinance," "Kiva
and the microfinance world are set up not just as a better way to fight
banking but also an important way to rethink traditional modes of
giving and global social justice."
The founders of Kiva are bullishly promoting their new approach
while experienced microfinancing institutions remain cautious in their
assessment and others critical. Nevertheless, Yunus' prize and the
arrival of online lending have prompted debate about the virtues of
online microfinancing as well as the virtues of microfinance per se in
Kiva's lead has been followed by others. Internet giant eBay
completed a complex regulatory process to launch the online
microfinance service MicroPlace on
Oct. 24. MicroPlace differs from Kiva in that lenders are purchasing
securities—investing in microfinancing institutions, not making loans
to individuals— and are paid interest.
Attacking Poverty Through Loans
One of the biggest challenges for the poor is gaining access to
capital and formal financial institutions. According to the United
Nations, about one billion people still live on less than a dollar a
day—a poverty trap that is virtually impossible to escape. But in the
past two decades, microcredit has become accepted as a potentially
successful development tool.
Now the microfinance sector is in the middle of a boom:
"Microfinance will grow more and more," claims Nairobi-based director
of Inclusive Financial Systems, Stephan Staschen. "More commercial
entities will also get involved as they realize its profitability and
the result will be that many poor people will be served."
programs extend small loans to the very poor, previously viewed as
bad-credit risks, through rotating savings and credit circles, which
take deposits and give loans at certain intervals and in strict amounts.
Such loans allow people to invest in the material, livestock,
skills, or machinery they need to generate income as well as pay for
emergency needs such as medical expenses or death and marriage costs.
"One of the great aspects of microfinance is that it smoothes the
financial lives of the poor when they face sudden outgoings as a result
of some catastrophe, disaster, or just an expensive wedding," says
Staschen. Although the definition of small loans varies, most are less
Most microloan programs focus on women. Experience has shown that
women are a good credit risk and invest their income in the well-being
of their families. "Now 96 percent of our four million borrowers in
Grameen Bank are women," said Yunus in 2004. Grameen was founded in
1976; by 2005, it had the equivalent of $678.28 million in total assets
with 5.05 million active borrowers.
The Consultative Group to Assist the Poor is a consortium of 31
public and private development agencies working to expand access to
microfinance. In June 2004, they agreed 10 key guiding principles
emphasizing that a microfinancing institution's core aim is to fight
poverty by creating transparent, sustainable, and lasting private
financial services that should be rolled out to the largest number of
'Loans That Change Lives'
Kiva.org was cofounded in 2005 by Matt and Jessica Flannery as the
"world's first and only online microlending opportunity," teaming up
with international organizations working in low-income communities. It
lists 61 partners in 37 countries that are responsible for deciding
which borrowers will be posted on the Web site. The loans are disbursed
to the partners—local microfinancing institutions—for ultimate
disbursement to the borrowers.
While browsing through the site, a potential lender sees brief
descriptions of the borrowers, making it easier to create a connection
with one or more entrepreneurs. By using the Internet, Kiva claims to
have reduced costs.
It appears that many "ordinary" people are choosing this route,
perhaps over more-traditional methods of donating money. As of Nov. 13,
Kiva.org had raised $14 million from 142,000 people to fund 20,769
loans—and the count changes daily. That represents a sizeable amount of
cash from a large number of people who, more likely than not, did not
previously know about microfinance or microfinancing institutions.
But with the support that Kiva.org has received from high-profile
supporters such as former President Bill Clinton—who featured it in his
new book, "Giving: How Each of Us Can Change the World"—Kiva will
continue to serve as a conduit for those wanting to reach the poor.
"Our biggest challenge has been keeping up with our growth," says
Fiona Ramsey, Kiva's public relations director. "To date, our biggest
growth restriction has been partnering fast enough to keep up with the
growing demand by lenders to place more loans. We have been managing
this challenge by expanding our partnerships team and bringing on
Can Microfinance Deliver?
The sector has its share of critics, who think institutions charge
interest rates that are too high and the loans do not reach the
poorest. Some say the exaggerated focus on microcredit has led to
neglect by state and public institutions in addressing the employment
and livelihood needs of the poor.
According to research by the Consultative Group to Assist the Poor
in 2003, evidence of the effectiveness of microfinance as a tool for
development remains slim, partly because of the difficulty in
monitoring and measuring impact. Questions have arisen about whether
microfinance can ever be as important a tool for poverty alleviation as
its proponents and practitioners suggest. "It's an important
contribution but only one of many interventions," admits Staschen.
Thomas Dichter of the Cato Institute, the Washington, D.C., based
think tank, calls the potential of microfinance "grossly overestimated."
Dichter claims: "In Bangladesh, 30 years after Yunus' invention,
poverty statistics are worse than they've ever been, so something else
is the source of the problem and microcredit is not helping." Economics
journalist Gina Neff has also written that "after eight years of
borrowing, 55 percent of Grameen households still aren't able to meet
their basic nutritional needs—so many women are using their loans to
buy food rather than invest in business."
According to the Institute for Food and Development Policy, this
brings into question the social mobility of loan recipients, especially
the poorest of the poor. Scholars argue that microcredit is more often
used as a form of disposable income, rather than being reinvested.
Dichter also criticizes the influx of microfinance institutions,
claiming that agencies are "jumping into this field" under the
assumption that they can alleviate poverty without actually looking at
the different causes of poverty in different regions. In recent
writings he argues that microfinance could be doing more harm than good.
Microfinance may not be a panacea for poverty but as Kiva has shown,
technology-based financing methods could provide a solution to future
pro-poor funding issues for organizations keen to remain at the
forefront of technological opportunities. Despite the concerns of
conventional microfinancing institution practitioners, it may be too
early to judge whether the Kiva model is just a clever mechanism to
attract resources or a genuine revolution in individual funding to the
aid and development sector. In the meantime, thousands of low-income
individuals and families are gaining new hope as they try their hand at
small enterprises that were previously outside their reach. © IRIN
[This report does not necessarily reflect the views of the United Nations.]