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Kiva Lending Assists Start-Ups for World’s Poor

Business_Start-Up
Kiva, a micro-finance organization, makes small loans to individuals or groups in developing countries looking to build small businesses or fund other projects.

This type of financing allows the borrowers to potentially repay the lenders when a project has been successful, re-purposing the charity money to another group in need. Financiers believe that this type of lending supports economic and entrepreneurial growth unlike traditional charity.

By lending instead of giving, Kiva enables borrowers to engender societal change by providing them the start they need to create a profit. Seema Patel, a user of Kiva, shares what she has learned from the company: “Give a person a fish, you have fed her for today; teach her how to fish, you have fed her for a lifetime.” This effectively expresses the repayment feature Kiva employs.

Kiva has been the most successful organization in the micro-financing field. It works as an intermediary, posting ads from individuals or groups seeking loans and creating profiles that contain general personal information, a description of the loan needed, and a photo of the potential borrower.

Borrowers are rated on a scale of 1 to 5 stars based on their previous credit history with loans. 1 star means the borrower is potentially risky or newer and less likely to be funded, while 5 stars means the borrower is a safer investment.

Lenders are able to fund from $25 to $5,000 and the borrowers are only responsible for making their prescheduled payments once the loan has been fully funded. The average loan from Kiva based on their past 289,329 loans is approximately $694.

Most projects receive their funding within a day or less. Of all loans, 78 percent are funded within two days, and 68.17 percent are funded within the first day. There is no evidence to show that loans perceived as risky are funded slower than the loans perceived as safe. The popularity and success of Kiva allows for this fast funding rate.

Data show that lenders are more likely to fund projects that they believe will have a greater impact on alleviating poverty. Loans to men and to projects that request higher costs are often funded slower than loans to large groups of women.

This may be because lenders are looking to alleviate the poverty of groups or individuals who may be lacking a regular source of capital. In addition, loans that are financing education and health have the fastest rates of funding.

Although lenders fund loans with the knowledge that they might not be repaid, the default rate of repayment is only 0.7 percent. Loans to larger groups have higher repayment rates which make them more likely to be funded. The high repayment rate suggests that the loans are successful in spurring potential businesses and other projects.

– Amanda Panella

Photo: Flickr

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World Council of Credit Unions Improving Lives

World Council of Credit Unions
The World Council of Credit Unions has a simple mission: to improve lives through credit unions.

Credit unions give people in developing communities the opportunity to expand their horizons through microfinance, smart money practices and local businesses. The World Council of Credit Unions works to increase the number of credit unions around the world to give everyone their best chance at a healthy, prosperous life.

A credit union is defined as a member-owned and not-for-profit financial institution. This institution provides financial services, such as savings and credit accounts, to their members, although their formal name changes based on their location and people they serve. Credit unions serve their members based on a common linkage, like religion or occupation. Increasing the population of credit unions worldwide can help end poverty epidemics while improving the economic situations of countries.

The World Council of Credit Unions is a nonprofit organization that has been spreading the importance of credit unions worldwide since 2006. The international credit union system has more than doubled since its inauguration and continues to serve more than 200 million members to this day. The organization has credit unions in 105 countries as of 2014, including nations in Latin America, Asia and Africa.

Financial inclusion programs assist credit unions and their members in areas affected by serious conflict, helping them during and after the conflict has struck a country. These programs focus on bringing innovative technology solutions and providing resources to those in need. In total, the World Council of Credit Unions has 275 long-term and short-term programs that assist credit unions in more than 70 countries.

In 2014, the organization put forth its efforts to the project Vision 2020. Vision 2020 is a global membership growth project initiated by the World Council of Credit Unions to expand credit union services to at least 50 million new people by the year 2020. It is expected to solve the issue of having more than two billion people remain without banking services, with the majority comprising of women, young adults and those in extreme poverty.

The organization hopes to eventually raise the number of credit union members from 208 million to 260 million worldwide.

– Julia Hettiger

Sources: WOCCU 1, CUInsight , WOCCU 2
Photo: Google Images

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What is Microfinance?

MicrofinanceIn 2006, MIT Professor Muhammad Yunus was awarded the Nobel Prize for his work in the creation of the Grameen Bank. The Bank was created primarily to microfinance, or provide small loans, to the impoverished in Bangladesh. Today, over 97 percent of Bangladesh’s villages have a Grameen Bank presence, a whopping 7.5 million people have borrowed from the Grameen Bank and 65 percent of the borrowers “clearly improved their socio-economic conditions.” Yunus has even advocated for credit to be considered a human right because of the extent to which it can help people deal with their financial situations.

Prior to the emergence of this practice, the term “finance” largely carried the connotation of large banks, governments and corporations, and their respective handling of money or value. Liabilities, assets, savings, loans and other banking concepts can all be categorized under finance. So then, what exactly is microfinance?

Microfinance is the practice of bringing financial systems that are commonly used in the developed world, and applying these concepts on a much more personal and micro-scale. While we typically think of finance as a system that deals with large sums of money and organizations, microfinance is quite different because it deals with much smaller denominations of money and groups or individuals.

In practice, microfinance institutions or programs can differ in their specific models of operation. For example, Kiva is a microlending institution. It operates on donations, and any donor can personally become involved by browsing through testimonials and deciding whom to fund. On the other hand, the Grameen Bank no longer takes donations, and the Bank itself is actually 94 percent owned by the borrowers themselves. The majority of microfinance institutions deal primarily with microcredit, with most extending credit to women. About 97 percent of Grameen Bank’s loans are offered to women.

One point of criticism is the very high interest rates sometimes charged by various microfinance institutions; in some cases, the rate is over 50 percent. However, many argue that this is necessary to cover administrative and risk-taking costs. Defendants of the interest rates contend that participating in the loan program does not proportionately diminish the received benefits based on interest rate.

The benefits of providing financial services – often taken for granted – are unmistakably significant. The first benefit, as told by Mr. Yunus himself, is the mental and psychological stimulus a loan can give a person. The recipient of the loan becomes more independent and less inclined to feelings of marginalization. The second benefit is an increase in small businesses and economic activity in the villages. For some, small loans serve as the building blocks for small businesses. For others, the loans help pay for large goods or services like schooling, or healthcare costs, among other things. Providing small loans at affordable rates allows people to have more purchasing power than they might have otherwise, and to make purchases once considered not within their means.

An MIT study titled, “The miracle of microfinance? Evidence from a randomized evaluation,” was highly critical of the actual effects of microfinance versus the observed perceived effects before the study. Those conducting the study found that microfinance had some benefits for helping businesses increase profitability, and in increasing household income. They also found that household spending increased on durable goods, meaning goods that can be used more than once like cooking pots and mosquito nets. However, the MIT study found no significant changes in women’s empowerment, education or health. Finally, the study found that the adoption rate for microfinance was around 38 percent, indicating that many people still preferred to take out informal loans from other parties or family members.

Despite the critiques, microfinance has emerged as an innovative tool within the largely unchanging financial sector. By giving the impoverished access to financial services, the affected begin to have more opportunities and resources to turn to when dealing with personal or small business finances.

There are 2.5 billion people worldwide who are “unbanked” according to the World Bank. High costs, bureaucratic barriers and physical distance from banks facilitate this huge gap in the number of people with access to financial services and the total population. Microfinance has the potential to help bridge this gap by empowering the poor and providing them with more tools to help themselves. Although it may not be a miracle, it’s certainly better than nothing at all.

– Martin Yim

Sources: PBS, Kiva, Grameen Bank, MIT, World Bank
Photo: Flickr