Micro
Lending: A Risk I Am Willing to Take
As a woman in American society today, it can be easy
to forget that many generations of woman before me have worked hard and
sacrificed to ensure my right to choose the a given career as well as the
ability to graduate from a prestigious MBA program. I am proud of these women
and honored to represent them; yet there continue to be many obstacles for women both
in finance and in the world. As a
woman, as a MBA student, but most importantly as a member of the financial
industry, I am attracted to the idea of micro loans. Micro loans are very small
loans of capital provided to impoverished borrowers who lack collateral and/or a credit history. It is designed to support entrepreneurship, lower poverty rates, and has typically been used to empower women in developing contexts.
Admittedly, there has been some debate
on whether micro lending is successful in its goal to stimulate developing economies and completely eliminate poverty (a lofty goal by any standard).
Based on the research and real world examples of women moving from domestic, passive roles to financially supportive or even leadership positions in developing countries, most people would agree that micro lending is making a
positive impact. Below are the top five reasons:
It is a loan, not charity. Micro lending works because it is a business transaction. The lenders recognize that the women who are receiving these loans must have pride in themselves and their work to be successful, and this includes the ability to eventually repay the loan. It is an investment, not a handout.
It takes a small amount of US money to make a big difference. A typical loan is around $25 dollars. Not surprisingly this translates into much more when exchanged for the local currency in a developing nation. Need an example: http://money.howstuffworks.com/microlending3.htm. So while the sacrifice of not buying a last round at the bar might hurt temporarily, the potential return of turning that money into a micro loan seems worth it.
There is a high success rate. Over 585,000 people have loaned more than $100 million to 249,000 entrepreneurs in 49 countries. Kiva is known as one of the leaders when it comes to micro lending. On average, loans made though Kiva.org have a 98% repayment rate.
It is a loan, not charity. Micro lending works because it is a business transaction. The lenders recognize that the women who are receiving these loans must have pride in themselves and their work to be successful, and this includes the ability to eventually repay the loan. It is an investment, not a handout.
It takes a small amount of US money to make a big difference. A typical loan is around $25 dollars. Not surprisingly this translates into much more when exchanged for the local currency in a developing nation. Need an example: http://money.howstuffworks.com/microlending3.htm. So while the sacrifice of not buying a last round at the bar might hurt temporarily, the potential return of turning that money into a micro loan seems worth it.
There is a high success rate. Over 585,000 people have loaned more than $100 million to 249,000 entrepreneurs in 49 countries. Kiva is known as one of the leaders when it comes to micro lending. On average, loans made though Kiva.org have a 98% repayment rate.
Repayment process. Cultural pressure ensures that the loans get repaid. Many traditional societies maintain strict social codes to repay what is borrowed. If an individual fails to repay on time, the borrower's family name and reputation may be compromised. In addition, many micro lenders employ collection agents who make weekly visits to borrowers for collection purposes.
Encourages
female entrepreneurship. Small micro loans made to women allow them to run their businesses, hire other local
women and support their families. In many of these countries, these successes
allow women to have a voice in society for the first time. A loan is not
just buying a sewing machine; in many cases it is also changing the perspective
of women culturally. In addition, it serves as an example to other females and
more importantly the younger generation on the role successful women can play. It is my hope that micro lending is a risk people would be willing to take - both from a financial and humanitarian stand point. I also believe that women especially should be attracted to trying to help other women succeed. ting industry and can have a very big impact in third world countries and the role of woman in our world.
By,
Carol Ann Michel, a first year Notre Dame MBA
Carol Ann Michel, a first year Notre Dame MBA
Sources:
http://en.wikipedia.org/wiki/Micro_lending
http://www.worldvisionmicro.org/
http://www.lendacademy.com/a-brief-history-of-microlending/
http://www.debate.org/opinions/is-micro-lending-a-viable-method-for-helping-stimulating-third-world-economies
http://en.wikipedia.org/wiki/Micro_lending
http://www.worldvisionmicro.org/
http://www.lendacademy.com/a-brief-history-of-microlending/
http://www.debate.org/opinions/is-micro-lending-a-viable-method-for-helping-stimulating-third-world-economies
Thoughtful piece, Carol Ann. I like how you make the distinction between micro loans and the concept of charity. Loans allow the person to pay the value back and develop a since of pride as you mention. I agree that this factor can be incredibly valuable in developing self-confidence and encouraging women to be vocal in their community.
ReplyDeleteGreat post, Carol Ann. Your section on the positive impact associated with micro-finance brought me back to our BoP discussion on Wednesday. This, in my opinion, is a much better (and more sustainable) way to boost local economies and develop the infrastructure necessary to support small businesses. Measures to increase consumption become much more sustainable when income generation is accounted for.
ReplyDeleteThanks for your post, Carol Ann. Like Danielle, I also like how you make the distinction between micro loans and the concept of charity. That being said - I think there's an interesting dissonance with micro-loans. On the one hand, they are designed to help people in poverty get ahead, start their own business, and employ other members of their community. On the other hand, the rate of interest that is charged to the recipients of these micro-loans can be very burdensome. Is this fair? Do micro-loans achieve outcomes that have the best mix of profits and social benefits?
ReplyDeleteGreat piece, Carol Ann. Micro-lending seems to hold a lot of potential. However, I think the distinction between charity and investment as an argument in favor of loans may be misplaced. If the loan/donation is $25, then what advantage does the entrepreneur gain from having to repay the $25? The argument you're making to attract investors is true, that people would prefer to be lenders rather than benefactors. Lending someone my car/bike/computer/book etc is naturally much more enticing than giving those same items away. But I don't charge interest or a rental fee for those items. I do not see a return on such lending (just the return of my stuff). So why is micro-lending a better option than charity? As Anna pointed out, there is a major problem with interest in micro-loans and it seems like the issue rests with the lender more than the borrower. Is micro-lending simply the reincarnation of old-fashioned usury? We often frame and discuss the problem as the BoP lacking access to capital. Instead, what if the real problem is actually the unwillingness of people above the BoP to give or lend without interest? Without a return? In this light, micro-lending is much more of a solution for the ToP than the BoP.
ReplyDeleteCarol Ann - Hope you saw that we pulled this up to Irish Impact! With the help of our student spotlights, we have had over 700 views in the last month, which is great for a still-fledgling blog like ours! Check it out at: http://irishimpact.wordpress.com/2014/04/11/mba-student-spotlight-a-risk-i-am-willing-to-take/
ReplyDeleteYou raise up important points in this post Carol Ann, although it is necessary to consider the other side.
ReplyDeleteThe $25 mentioned as a significant amount in some underserved communities, is disposable money to many in the regions of the lenders. If this is the case, then what is the value in adding stress and pressure on the borrower?
In addition to the added pressure of having to repay the debt, which sometimes amounts to a huge burden, since this amount is trivial to the lender, wouldn't it be better to allow the borrower to invest it in growing the business even further or improving their livelihood.
I feel that micro-loans, if we want to maintain the strength that lenders feel more encouraged to perform and deliver, can be a more socially responsible model if the borrower returns that loan to the community of borrowers so that another borrower can benefit, and this way a single micro donation goes a long long long way, if every successful business returns the original $25 lent.