Thursday, December 25, 2008

Trying out for micro-lending around the world

I still have not decided what to do with my extra $20, but I did decide to go ahead and try out which lets you participate in micro-lending around the world. I actually funded my Kiva account with enough money to fund a dozen micro-loans in the $25 to $100 range. The actual micro-loans are in the $225 to $2,500 range with a number of lenders such as myself kicking in $25 or more for each loan. I figured that since there was a chance that a single loan might fail, a dozen loans would have a better chance of giving me reasonable success and personally give me a broader perspective on the failure rate as well as exposure to different parts of the world and different types of micro-entrepreneurs. Note that Kiva micro-loans do not pay us "lenders" any interest, but they do pay us back our principle, unless they fail.

I believe that the micro-entrepreneurs (borrowers) are in fact paying interest, but that the local micro-lenders keep most or all of that interest to fund their operations and expand their capital for additional loans. I do not know whether Kiva gets any of that interest. I just know that Kiva does not pay any interest to us lenders. In addition, Kiva "suggests" that you make a 10% contribution to Kiva. I decided not to make any donations at this time. I will see how things work out as the loans become due and then decide whether to make a donation.

You fund your Kiva account via PayPal and then make loans from your Kiva account. When loans get repaid you can then choose whether to use the proceeds to fund additional loans or to take your money out.

It will be interesting to see how the current economic recession impacts these micro-entrepreneurs around the world.

Note that the borrowers are very small businesses, typically individuals. The loans are to support their businesses. These are not consumer loans.

Also note that Kiva does not loan directly to the borrower. There are a number of micro-lending "banks" (Kiva calls them Field Partners) in areas around the world. Lenders like me are providing the capital (through Kiva) that these micro-lenders are then disbursing to the micro-entrepreneurs.

The micro-lenders also provide support and advice to the micro-entrepreneurs. Some also require borrowers to collaborate in groups to support each other. The goal here is to increase the likelihood that the micro-loans really will improve the business of the micro-entrepreneurs so that they do earn enough to repay the loans.

The term of a micro-loan may only be five to eight months, but sometimes a year or maybe even eighteen months. The idea is that the loan should have an immediate impact on business. The first payment may not be due for three months or so. For my initial loans a bunch have an initial payment in February or March. One does not have an initial payment until June.

I am not particularly thrilled that I earn no interest, but it is nice to be able to see the face, name, and details for each micro-loan. The theory is that this money is really making a difference in the lives of real people around the world.

It is also nice to know that these micro-loans are actually helping "the working poor" to maintain and even enhance their income, rather than simply offering them a "handout."

It turns out that many of these micro-loans have already been made by the micro-lender by the time we see them on the Kiva web site, usually within the past few weeks. The micro-lender has decided that they have enough funds on hand to go ahead with the loan and is essentially selling the loan to us micro-lenders through Kiva and then the proceeds of that sale is capital for making other loans.

Now, I still need to figure out what to do with my extra $20. It is not even enough to make the minimum Kiva loan of $25.

-- Jack Krupansky


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