Like most Americans, Dennis Barsema couldn’t imagine a world without credit cards, bank accounts and business insurance.
But that’s what life was like for the Nicaraguan villagers he met during a trip seven years ago to see how microfinance works in developing nations.
For three days, Barsema, his wife, Stacey, and their 23- year-old son, Matt, traveled by bus to villages outside Managua with a dozen other potential donors as part of an “insight trip” with Opportunity International, a microfinance organization based in Oak Brook, Ill., that gives small loans to poor entrepreneurs in 28 countries.
They crowded into the ramshackle homes of villagers who had received loans from Opportunity International to hear their stories. One man ran a bakery. Another made bricks for local builders. Many women worked as seamstresses.
Through a Spanish translator, Barsema and his fellow travelers asked the villagers questions: What gave them the inspiration to start their businesses? How had the loan changed their lives? Did their children go to school?
They also attended the weekly meetings Opportunity International’s loan officers held with the trust groups — 15 to 40 villagers who receive a loan of as little as $50 to divvy up and start or expand their businesses selling fruit, making shoes or raising chickens. The group’s members, traditionally women, are jointly responsible for the weekly payments, which include 15% to 70% interest to cover Opportunity International’s administrative costs.
Once the trust group pays off the first loan, typically in 14 weeks, they are eligible for bigger and bigger loans, a practice known as “stepped lending.”
“The thing that struck me was that this was a selfsupporting model,” says Barsema, 55, who spent his career running technology firms that sold software and hardware to Fortune 500 companies. “If I give a dollar to an organization to feed the poor, once they use it, it’s gone. But if I give a dollar to an entrepreneur in a developing country, they pay it back with interest. Then that money can be lent to somebody else. It just made so much sense to me as a business person.”
Planting the Seeds for Success
Microfinance is an umbrella term for microlending (small loans), savings accounts and loan insurance for the poorest of the poor in Africa, Asia, Eastern Europe and Latin America, and more recently, the United States. While microfinance has received significant attention in recent years, the concept is not new. Small money-sharing groups of family members and friends have operated for centuries - probably since the introduction of currency. Modern experiments with microcredit date back 35 years to an economist in Bangladesh.
Muhammad Yunus, known as the “father of microfinance,” started giving tiny loans to village women who made furniture and who were struggling under the weight of famine and destitution. When these women needed capital to buy the bamboo used to make the furniture, they only had access to loan sharks, who charged them interest rates as high as 1,000%.
Believing that turning the poor into successful entrepreneurs could be a key piece in the fight against global poverty, Yunus founded Grameen Bank in 1983 with the mission to serve this population not only with low-interest loans, but with business counseling, health education and community development projects like building wells.
By the time Yunus and Grameen Bank won the Nobel Prize in 2006, there were approximately 10,000 microfinance institutions (MFIs) across the globe serving an estimated 100 million people with an average loan repayment rate of 98%. The MFIs also had expanded into offering savings accounts and loan insurance.
“Micro-entrepreneurs face great risk: crop failure, floods, military intervention and pandemics,” says Craig Meland, a corporate finance lawyer at Baker & McKenzie in Chicago, who donates time to writing contracts for microfinance organizations entering into agreements with lending partners overseas. “If a farmer’s crop were wiped out by a natural disaster, insurance would cover the $100 he borrowed to buy the seeds.”
Help, Not Handout
For many who donate to microfinance organizations, the appeal is that microfinance provides help, not a handout. And your contribution can affect people in poor countries beyond just those receiving loans. Rather than accepting charity, entrepreneurs seeking microloans to start businesses create their own wealth. Studies show that in domestic and international communities, microlenders have become permanent fixtures in local economies, and they contribute to economic development, job creation and financing grassroots enterprises that generate income and employment.
Moreover, microfinance donations can be stretched much further in places such as India, where a $50 loan to a basket maker enables her to make more baskets and use the additional income to repair the roof of her house and buy food for her family.
“Because the cost of living is so much lower in countries where most microfinance institutions are operating, a relatively small amount of capital can go a long, long way,” says Marguerite Griffin, the national director of philanthropic services at Northern Trust. “To have the same effect in the United States, you’d have to give a lot more money.”
ACCIÓN USA, one of the largest microlenders in the United States has loaned out approximately $154 million to more than 16,000 micro-entrepreneurs in the United States since 1991, with an average loan of $5,300.
Domestic microfinance organizations are broadening outreach to donors who want to support the entrepreneurial spirit and are interested in community development and renewal. “Especially with the current economic crisis,” Griffin says, “microfinance offers donors a way to give that really leverages their dollars for maximum impact.”
Choosing Your Approach
But before getting involved in microfinance, Griffin says, it’s important to ask yourself a few questions: What countries interest you? How important is it to have a personal connection with your borrowers? What religious philosophies do you feel comfortable supporting? How important is it to get a financial return on your investment? How will you measure success?
The easiest way to find an MFI in a region that interests you is to use Google and search for “microfinance” and the country you’re interested in. Grameen Bank, for example, serves clients in Bangladesh, while Pro Mujer focuses on women in Latin America. Or you can choose organizations like Opportunity International or Catholic Relief Services, which have operations in dozens of countries on multiple continents.
If you want to put a face on the people you are helping, you may want to consider organizations such as Kiva, a microlending Web site. The site posts profiles of people in need from around the globe, and allows you to search for borrowers by nationality, gender, business type and level of need — from a seamstress in Kenya who needs $75 to buy a second sewing machine to a soap maker in Brazil who needs $160 to increase production.
Using your credit card, you can loan your recipient as little as $25, which Kiva sends to a microfinance institution in the borrower’s home country that dispenses the loan and works with the borrower to ensure timely payment. Once the loan is repaid (typically in six to 12 months), it goes back into your Kiva account and you can withdraw it or lend it to another borrower who piques your interest. During the loan period, Kiva will e-mail you updates on your recipients’ progress and repayment history.
“These updates create a personal connection many donors are looking for,” Griffin says.
When choosing a microfinance institution to work with, keep in mind that many are faith-based organizations. Opportunity International, for example, was founded in 1971 on the belief that helping the poor start their own businesses was doing Christ’s work — a mission clearly stated on its Web site. The financial counseling it provides its borrowers includes religious teachings.
Some organizations are transparent about their religious philosophy, while others are more discreet. Be sure to research an organization’s mission thoroughly enough to ensure it’s in line with your values.
Reaping Your Rewards
As with any charitable gift, microlending also provides you a reward beyond the good feeling you get from helping others. Contributions to an MFI are typically structured as charitable gifts, not investments — you won’t get a dividend in exchange. Rather, you will get a tax break of up to 50% of your gross adjusted income if you’ve made a personal loan and 30% when you’re giving from a foundation.
Two years ago, Barsema started teaching a microfinance class at the Northern Illinois University College of Business, taking groups of students to Opportunity International’s operations in Guadalajara, Mexico, to see microfinance in action.
“It’s something people must do if they’re really going to understand the power of giving someone a microloan,” Barsema says. “You just can’t grasp the impact from reading about it.”
The Great Debate: Non- vs. For-Profit
Microlending started as a social movement to help poor people who had no access to traditional banks. Today, most of the money still comes from charitable donations, including large sums from prominent organizations such as the Bill and Melinda Gates Foundation.
Most microfinance institutions (MFIs) doing the actual lending are nonprofits or nongovernmental organizations that charge only enough interest to cover the costs of administering the loans.
But as the movement has grown, some MFIs have become more like traditional banks that can accept deposits and offer services like savings accounts and insurance. As part of this transformation, some have begun shifting to a for-profit model, taking funding from investors who expect financial returns.
That’s angered activists such as Mohammad Yunus, who say that shifting the focus from helping the poor to satisfying shareholders undermines the mission of microfinance.
But capitalists like eBay founder Pierre Omidyar, who’s given $270 million to nonprofit microfinance organizations and invested $200 million in for-profit ventures, claims the for-profit model is crucial to making a dent in global poverty.
He argues there aren’t enough donations in the world to fund the need for microloans. To date, microloans have helped nearly 100 million people. But that’s a fraction of the 2.7 billion people living on less than $2 a day.
The only way to expand that reach, Omidyar says, is through things like microfinance investment funds, which are attracting significant funding from institutional investors such as pension funds, insurance companies and universities.
Like all lofty goals, the philosophy of microfinance is simple. Alleviating global poverty is far more complicated.