May 20, 2011
Microfinance is a socially conscious form of lending that is aimed at providing financial services to the world's poor. Microfinance refers to all loans, donations, insurance or other fund transfers that are enacted with the primary goal of helping the world's working poor out of poverty and give them access to financial services. The history of microfinance can be traced back to the 1970s and the Grameen Bank Project. This venture raised funds and provided banking services to the rural poor in Bangladesh.
Microfinance can help small business owners prosper who otherwise have no ability or options to receive working capital for a viable business. Interest rates charged on microfinance loans are at better rates than an entrepreneur in an impoverished country would find in their local market. Most microfinance websites are vehicles to raise funds for individuals in poorer countries, although some new sites have launched that cater to worthy causes or projects in the United States as well.
Microfinance contributions can be designed to provide positive investment returns for investors or consist of tax-deductible donations. In both cases, the primary goal for lenders is creating jobs, funding worthwhile projects, stimulating local economies in poor countries and reducing global poverty. Investors can be organizations, institutional investors or individuals who can only afford a few dollars in loans, investments or donations at a time. The primary motivation for making a microfinance contribution is very simply the satisfaction of knowing that their funds are helping the working poor out of poverty.
Investing in a microfinance project can be as simple as a one-time transfer from an online checking account. Microfinance sites have evolved to the point that you can log-in and track how well each project is progressing.
Loans that change lives
Kiva lets visitors connect with small business owners in poor countries. The Kiva global community of over 200 countries connects individuals and their dreams to lenders who want to help fight poverty. Lenders can browse loan requests and select the loans that they would like to fund. Loans can be for as little as $25 or as much as the entire amount of the requested loan. The Kiva website features a Facebook social application that makes it easy to follow the Kiva community of lenders and borrowers.
Lenders will be notified by Kiva when repayments have been made by borrowers and those funds can then be withdrawn or lent to another poor entrepreneur. Kiva lenders do not receive any interest, but Kiva has a strong track record of finding very motivated people who have paid their loans back on time. The repayment rate Kiva loans has been consistently above 98% since the site launched.
Earn investment returns and lift people from poverty
MicroPlace provides everyday investors with the ability to make small microfinance investments. The site and the company are owned by eBay, who bought the upstart microfinance organization in 2006. The way that MicroPlace works is that an investor opens an online investment account and can then choose an investment from an impoverished country. The investments, which can be for as little as $20, are aimed to help the working poor by providing cheaper capital.
The investment actually works as a loan to a well-screened lending organization tasked with screening small business owners in their geographic area. Loans have a repayment schedule, as well as a set rate of interest paid back to the investor. The nice part about the online lending process through MicroPlace is that you can research on the site the specific micro-entrepreneur who will receive your loan. MicroPlace loans have a risk of principal loss, although the company has stated that none of their lending institutions has defaulted on payments to investors to date.
Making capital markets work for the entrepreneurial poor
MicroVest is a microfinance site that can make it easier for investors to include socially-conscious investing as part of their investment portfolio. Essentially, MicroVest is an investment firm that raises debt and equity capital for private investments in the microfinance industry. Investors who purchase MicroVest notes are not supporting individual entrepreneurs, but are helping build capital markets in the microfinance industry that support the world's poor. In the past, MicroVest notes have been made available through the Calvert Foundation.
The Calvert Foundation is a well-known non-profit dedicated to fighting poverty. MicroVest investments can be purchased through most broker-dealers and pay interest on their notes. The notes can be held in a brokerage account along with an investor's stocks, bonds and mutual funds. MicroVest is a microfinance site that can make it easier for investors to include socially-conscious investing as part of their investment portfolio.