Monday, July 19, 2010

Microfinancing Student Loans

I recently stumbled upon a new take (or at least new to me) on microfinancing, in which you offer relatively small amounts of money to impoverished people, so that they can help themselves out of poverty and pay you back. These programs have proven incredibly successful since they were initiated by Muhammad Yunus, who founded the Grameen Bank as a means of providing them in his native Bangladesh. The Grameen Bank and Yunus were jointly awarded the 2006 Nobel Peace Prize "for their efforts to create economic and social development from below."

Student Loans

Many people have looked into new way expand the microfinancing model into new areas, but this is one of the most interesting that I've see. Vittana allows you to search for a student in a country that does not have many college loan opportunities, so that you can help microfinance student loans.

I don't have the experience with Vittana that I have with some other microfinance organizations discussed below, and since Vittana's new there's little on record about it. They don't yet have a Charity Navigator profile and only a very barebones GuideStar profile.

What is Microfinancing?
In short, it provides those in extreme poverty a way to get money for start-up capital to get ahead in their small, entrepreneurial businesses. For example, Yunus found that poor craftswomen were being charged such extreme interest rates by loan sharks to borrow money that, by the time they bought the materials and paid back the interest, they had no money left. Even worse, many money lenders demanded that the women could only sell their wares to them, which essentially gave the money lenders a bank of slave labor ... for as little as $27, as he discovered. Yunus paid this money out of his own pocket to break the hold the money lenders had on the women, and sought to expand the program.

However, because these were poor women, they could not get loans from any other source. Many were illiterate, and therefore had barriers to completing the required paperwork to get loans. His story of expanding this program is really inspirational, as you can learn in his Nobel Lecture. Here's an excerpt, discussing how the emphasis of our current economic system robs us of some essential elements of our humanity:

I am in favor of strengthening the freedom of the market. At the same time, I am very unhappy about the conceptual restrictions imposed on the players in the market. This originates from the assumption that entrepreneurs are one-dimensional human beings, who are dedicated to one mission in their business lives − to maximize profit. This interpretation of capitalism insulates the entrepreneurs from all political, emotional, social, spiritual, environmental dimensions of their lives. This was done perhaps as a reasonable simplification, but it stripped away the very essentials of human life.

Human beings are a wonderful creation embodied with limitless human qualities and capabilities. Our theoretical constructs should make room for the blossoming of those qualities, not assume them away.

Now, microfinance is becoming a very popular form of philanthropy. Individuals can take part through Kiva (a non-profit which provides no interest back to the individual lender) and Microplace (a for-profit which does provide an interest-yielding return on the investment). There are some other differences, too. On Kiva, you choose a specific person or group to loan money to, while on Microplace you're investing in a lending note that will be provided through a separate agency to needy people in the region chosen without ever knowing precisely who the money actually goes to.

There are several nice aspects to microfinancing. First, you don't actually lose your money. Assuming that the borrowers don't default on you (and the overall default rate is low, at around 2%), the money is paid back. You can either re-loan it out to a new borrower or withdraw it. This makes these sorts of programs a nice place for socking away some extra money as part of your nest egg. It's not highly leveraged, and is far less volatile than the stock market.

Second, it's not a hand-out, but instead a business agreement. There is no social stigma or loss of dignity for someone who accepts a business loan.
    Third, the systems in place allow you to really have a lot of options in how you direct your money, moreso than with some other charities. In general, a charity is either local or global, and either way you don't have a ton of say-so in how your donation is spent. This, however, often lets you target a specific type of entrepreneur or borrower, so that you can be sure you're supporting a project that you really want to support.

    Finally, the benefit of microfinance is that it's based upon the actual needs of the local people in impoverished areas. They need the money to achieve necessary goals, and are asking for the money. It isn't a case where someone in the United States just decides that these people need a certain sort of service. (Not that there's anything inherently wrong with these programs, such as One Laptop Per Child, but the fact that they are not locally-centered is a bit of a drawback.)

    What do you think about Vittana, or about microfinancing in general? Have you had experiences with any of these programs?