What is Microfinance?
Microfinance, very simply, is providing financial services to very poor people while taking little or no collateral. These are the poor of the poor, and the loan often allows them to start or grow their small business (it may be as simple as allowing them to buy a goat or a pig or may be to provide extra working capital for their business) and they pay back the loan like a normal borrower.
Why does microfinance appeal to me?
The beauty in microfinance is that you are effectively helping people help themselves. Whereas a 'handout' is often necessary and helpful, once that money is spent, it cannot do any further good. However, when you are repaid the loan, you can then on lend it to someone else and with the same money you can do good for multiple people over time.
If you add a little bit more money to your 'lending pot' each year then the amount of good you do grows significantly over time!
Isn't there the possibility that the borrower won't repay the loan?
Of course there is the possibility that you will lose some of your money and that the borrower will default. This is normal for a lending organisation. Banks normally diversify their loan book so that no one loss will hurt them too
much. You can do this too - instead of loaning $100 to one borrower, you can lend $25 to multiple people.
Also you can do diligence on the organisation that you are lending through. Kiva, the company I use, does due diligence on the in-country microfinance organisations that actually disburse the money. You can view the risk rating of the organisation, how much money they had actually lent, their return on assets etc. It is something definitely worth doing.
But the biggest mitigating factor is that, if you view this as a donation, you don't really care if you lose the money. With a "normal" donation you would never see the money
I donated / lent through Kiva
I used Kiva to donate my funds - it is one of the older 'umbrella' organisations and it has quite a good reputation. I have met several friends and colleagues who have been using it for years and almost all of their feedback is positive.
If you do decide to use Kiva remember:
- Their $25 donation increments are in USD so make sure you account for the currency impact before you decide to donate A$75 and find you are actually donating closer to A$90
- They do not charge a fee however put a 'suggested donation' amount - perhaps I wouldn't mind donating tot hem to cover their admin costs in the future but I don't want to just yet so make sure you are aware of this
- They allow you to donate the loan repayments to Kiva to cover admin costs - I definitely don't want to do this as I want to on lend this money after it is repaid
I will let you know how this goes in the future but it is something that I am quite excited about!
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