Microloans are very hip. For Christmas last year, my aunt gave money in my name to some kind of microloan non-profit, and she’s usually very up on what the totebaggers are doing. It all seems like a great idea to me, and when I look at my own city, I sure wish there was some way to use the same principles here in the US — I sure wish local government could help out with small amounts of money to small business people instead of going for high-cost home runs. I’ve had conversations where “microloan” (temporarily) became one of those buzzwords like “tipping-point”.
All of which makes me worried about where the whole concept might be headed:
Indian microfinance lender SKS goes public, raising $358 million and making its founder dynastically wealthy. The decision was controversial, and was largely responsible for an entire non-profit organization, Unitus, disappearing. When that kind of money is at stake, noble non-profit principles have a tendency to evaporate.
Steven Schwarcz of Duke University, has a bright idea: why not use the magic of securitization to provide funds for microfinance lenders? “Such disintermediation,” he writes, “would enable microfinance loans to be funded directly from low-cost, and virtually limitless, capital market sources”. What could possibly go wrong?
[….]My feeling is that good non-profit microfinance organizations do exist, and that they should be supported with grants first, with technical expertise on things like underwriting and growth strategies second, and with local-currency funding third. If someone tells you that you can help bring millions of people out of poverty while still making a profit on your investment, your first reaction should be that they’re selling something which is too good to be true.
People like to make money and feel morally superior at the same time. I throw up in my mouth thinking of western investors patting themselves on the back for turning third-world small business people into debt slaves, and I hope that’s not where this is all headed.
gwangung
Oh. Holy. Shit.
Friend of mine wrote a play a year ago DETAILING THIS EXACT SAME SCENARIO.
And it’s opening this month.
The horse wants to go back into the burning building.
DougJ
@gwangung:
Your friend was prescient.
Raenelle
Keep hope alive doesn’t mean turn your brain off. Of course, this is where it’s heading.
MDC
“If someone tells you that you can help bring millions of people out of poverty while still making a profit on your investment, your first reaction should be that they’re selling something which is too good to be true.”
It seems entirely possible that lenders could make reasonably priced microloans and make a modest profit. The problem would be if the sector became overrun with lenders determined to make huge profits.
DougJ
@Raenelle:
Thanks for the pick me up.
AxelFoley
Man, I saw this title and I thought it said “Micronians”. I was about to have a Robotech flashback.
Davis X. Machina
It seems entirely possible that lenders could make reasonably priced microloans and make a modest profit.
We actually used to have these all over America up until about 1980 or so. The were called ‘savings and loans’. Pretty much every town had one, the people who ran them usually lived in and understood their communities, they were pretty heavily regulated… They even made a movie about one of them, but it was in black and white, and died at the box office.
I wonder what happened to them.
gwangung
@DougJ: Of course, he had it with Harvard and not Duke, but that’s just Northeast bias…
DougJ
@gwangung:
Heh.
Anne Laurie
@DougJ: Is there a link for the article you excerpt here?
Suffern ACE
I can’t wait until we start talking about Microloans 3.0, in which PE firms buy out those companies and hire consultants to come in and turn them around. My guess is one of the recommendations will be “you know, your costs would go down if you wouldn’t make so many small loans to so many people, but instead made larger loans to fewer people.”
beltane
The magic of securitization, a force that turns all things to shit.
Violet
A couple of years ago, when credit really got tight, someone tried to start a microloan thing here in the US where people posted why they needed a loan and other people could read through the site and pick to whom they wanted to loan money. So a baker in Fresno could get a $1,000 loan to buy a new piece of equipment for her bakery, and the person who loaned the money could be in Topeka or Ft. Lauderdale or something. The person who loaned the money got a specific amount of interest back, but there was also a certain amount of trust involved. You essentially invested at your own risk.
I thought it was a really cool idea. So did a lot of other people. It was really popular. So of course the SEC shut it down.
burnspbesq
In a lot of the world, microfinance has funded huge numbers of startups in retail and services. Some of the examples are as simple as a woman borrowing money to buy the first cell phone in her village and in effect becoming the telephone company.
People borrow to buy raw materials for apparel manufacturing. The borrow to buy inventory for village grocery stores. They borrow to buy fertilizer and pesticides. A lot of the borrowers are women. I’ve heard people argue that micro-finance lenders have done more than anyone else to improve the lives of women in Sub-Saharan Africa.
This is a fantastic thing, and should be encouraged and facilitated. If someone offers to sell me a slice of a securitiziation of micro-finance loans, I’m in, and I won’t care very much about the return. I’d treat it as an Irish Catholic mitzvah.
Violet
Oh, and I heard Mohammad Yusuf speak a few years ago. He’s the guy who started Grameen Bank (the original microloans in poor countries) and won the Nobel prize. He said he was bringing Grameen bank to the US, specifically in NYC. He thought the payday loan places were criminal and were a great opportunity for something like Grameen bank to step in and offer another way of doing things.
Haven’t checked to see if he’s followed through and Grameen bank is here or not.
slag
This is an interesting problem that I was recently discussing with the ED of a nonprofit that uses funds from the sale of regional handicrafts to fund conservation efforts in that region. I got him to talk about how important it was, in the contractual stage, to strictly tie the economics to the conservation. In the end, I had the sense that it can be done. But it has to be done very carefully with constant review and oversight with really good measures in place.
In this case, the obvious measures include the percentage of loans that are paid off and how quickly the loans are paid off.
burnspbesq
@gwangung:
Damn Duke-haters are everywhere.
burnspbesq
@slag:
I don’t have the data handy, but I remember reading that default rates on micro-finance loans are amazingly low, in part because most of the lending is for working capital for businesses that turn inventory into cash pretty quickly – like grocery stores.
WereBear
Thanks for this: we’ve been wanting to explore microloans as a socially conscious investment strategy, scaled to our tiny funds.
Of course, there’s that knotty question: when people are paying 29% on their credit cards, and savings accounts pay 1%, isn’t it strange there isn’t a way someone can’t lend at 7 or 8%, let people pay off their credit cards, and reap investment benefits for those who need them?
You know, some radical ideas like that.
mr. whipple
Yeah, well. I’m a cynic.
slag
@burnspbesq: Yeah. I’ve heard that too.
In terms of DougJ’s concerns about creating debt slaves, I would look for orgs whose repayment percentages and timeframes fit the average, if I were going to invest. Not for my own protection, obviously, but for that of those receiving the loans.
Roger Moore
@burnspbesq:
It’s also partly because the organizations making the loans have figured out ways of applying social pressure to ensure payment. The ones I’ve read about have regular gatherings of the borrowers where they talk about what’s going on with their businesses. Borrowers will work much harder to avoid defaulting on their loans if doing so will make them lose face in front of their peers.
DougJ
@Anne Laurie:
Thanks — sorry about that.
That's Master of Accountancy to You, Pal
@Violet:
Well, yeah. It’s hard to list how many securities regulations that breaks. Welcome to the reality that financial regulations do have downsides.
That's Master of Accountancy to You, Pal
@WereBear:
Mostly, it’s because people carrying big balances on their credit cards bring with them an enormous amount of credit risk. I don’t know the numbers, but I’d be surprised if you could actually make a profit loaning to them at 8%, even before taking overhead into consideration. The only way it could work is if you put a lot of effort into sorting out who is likely to pay you back and who isn’t. That, of course, just drives up the overhead.
Kristine
I’ve loaned money through Kiva. I haven’t heard anything bad about it, and I like to think I’m helping people.
Three-nineteen
@Kristine: I do too. But lenders don’t make any money off of the loan at Kiva – they just get the principle back. I treat each loan I make as a donation. If I get it back, great! I loan the same money to someone else. If I don’t get it back, well, it was a charitable donation.
I have made over 20 loans and have only had one person default. I also make actual charitable donations to Kiva itself – those are tax deductible.
Honus
Let’s see. We’ve cashed out all the houses in this country, let’s fund the next boom on millions of small loans to poor people in India. And it took a Dookie to think that up.
valdivia
Funny I have been making a similar point when I teach development classes. Anything that begins like a fad in the financial sector is going to turn into bad bad news…the microfinance fad and the way NGOs embraced it without thinking about the partnerships with the finance people always raised a red flag for me.
Honus
@burnspbesq: there’s a reason for that
Michael D.
I’ve been lending 100’s of dollars for years via microloans. I’ve never lost a penny. And even if I did lose 20%, its worth it.
Turbulence
I think a lot of the discussion about microlending has been…confused. As I understand it, most microlending does not fund new ventures and entrepreneurs. That doesn’t mean it is not useful or important or helpful — on the contrary, it is incredibly important to many families. For many clients, microlending is a way of providing banking services to people who don’t have access to them.
We take banking services for granted, but they’re actually really important. Imagine that you’re a rural farmer in India. Your income is not constant; its not like you get a monthly check from your office job. Instead, you get paid most of your yearly income at harvest time. But since you have no access to a bank, you’ve got to keep that cash at home. Where thieves or your drunken relatives or you yourself in a fit of gambling might take it. Think about how projects are funded in a rural village: a village leader shows up at your door and asks for cash to pay for some festival. It is pretty hard to say no when your cash is right there on the table next to you. Peer pressure can be intense and you have no plausible deniability to refuse. Because these people don’t have banking available to them, it is a lot harder for them to hold onto cash, which makes it a lot harder for them to save.
Microlending is not basic banking, but it can serve much the same function. You can pass cash back and forth through your loan to the microbank and now you’ve got a great excuse for the village elder who shows up demanding festival payment. Plus you’re much less likely to have it stolen or to waste the cash while on a drunken bender. And when it comes to loans, microlenders are much much better than the traditional money lenders. Microlenders charge exorbitant interest rates, but they’re still much much better than the money lenders.
Because of all this, I don’t think microlending will really take off in the US. We have basic banking services; some of our banks (we call them credit unions) are even not very sociopathic. And we have easy ways to get small amounts of credit (we call them credit cards). So microlending in the US is a good solution to a set of problems that we, fortunately, don’t seem to have.
valdivia
I guess I should clarify that what I mean is that when Wall Street gets excited about microfinance as way they can make money off developing countries this is when I get skeptical.
Ruckus
The world of microfinance has good people/companies and bad people/companies. IOW normal people and greedy people.
A problem and one that microfinance tries to answer is that most of the countries where they operate have very limited banking systems which are aimed at the wealthy. The poor never have a chance to do anything except stay poor. Most of the loans are made for business purposes not personal lines of credit like a credit card. Some that I know of in the past for example allowed women to purchase a industrial sewing machine and do piece work in their homes. This cuts out the middleman/sweat shop type of system and allows the women to set their own hours around their kids needs. One small company that I am familiar with used to have a 100% payback ratio.
Some of the companies are trying to set up better financial systems that are responsible to their clients which allows both the company and the clients to grow. Without reliable finance the cycle of poverty can not be broken. And that is the same here as well but american banks don’t give a damn. Only the quarterly profits and year end bonuses are important.
Turbulence
@That’s Master of Accountancy to You, Pal: Mostly, it’s because people carrying big balances on their credit cards bring with them an enormous amount of credit risk. I don’t know the numbers, but I’d be surprised if you could actually make a profit loaning to them at 8%, even before taking overhead into consideration. The only way it could work is if you put a lot of effort into sorting out who is likely to pay you back and who isn’t. That, of course, just drives up the overhead.
Actually, credit card interest rates have almost nothing to do with default risk. Mike Konczal does the math here. Basically, credit cards don’t charge 27% interest because that rate is the minimum needed to cover the high default risk; rather, that’s the rate which maximizes total profit.
Ruckus
@valdivia:
They have been looking for some time at microfinancing, it just has not had the volume to get their interest. It may be getting there and if that happens then it will no longer be microfinance and they will have the same problems as many of us here do. But then the non profits and small micro banks will be able to get under the wall st radar and maybe it will work in the end.
Here we’re just screwed.
Luthe
The town I interned for was starting a grant program that gave businesses money to make streetscape improvements while they were renovating their businesses. It can be done.
That's Master of Accountancy to You, Pal
@Turbulence: They may not justify 27%. However, if you preselect for only those credit card users who need to take out a loan from someone else to pay off the credit cards, then 8% isn’t going to do it. You are not getting a random selection of credit card users; you are getting ones that are already distressed.
While credit cards on the whole may not need a 27% rate to cover credit risk, 8% probably wouldn’t cover it. It sure as hell isn’t going to be a money maker taking on the distressed loans.
The Other Chuck
@Violet:
Sounds like you’re talking about prosper.com. The SEC just shut them down for a few months because they were basically selling securities without calling them that, and making some pretty outlandish ROI claims.
They’re back, and doing fine, and if you want a risky investment with crappy return, you’re quite free to give them a whirl.
JBL
Microfinance does exist in the US: Accion international has a US branch, Accion USA: http://www.accionusa.org/
Also, here’s an interesting example of a city (Boston) putting up a small loan for a local business (food truck): http://www.cloverfoodlab.com/?p=1894
Todd
This is not Microfinance in the technical sense (no repayment), but you are making small donations to teachers for limited cost items that help them teach during the school year. Considering many teachers spend money out of pocket to buy many supplies, and this economy sucks for them just as much as anyone else, it’s probably a good way to help out and ensure that the next generation gets the education they need.
http://www.donorschoose.org/
burnspbesq
@Honus:
That’s OK. You keep hatin,’ and we’ll keep winning championships. Seems like a win-win deal.
Has any college athlete ever had a four-month period as good as Duke’s Ned Crotty? All he’s done since Memorial Day weekend is: (1) lead Duke to its first national championship in lacrosse; (2) win the Teewaaraton Trophy as the national player of the year; (3) get selected first in the Major League Lacrosse draft; (4) score the tying and winning goals for the United States in the final game of the world championship; (5) win the McKelvin Award as the outstanding male athlete in the Atlantic Coast Conference for the 2009-10 academic year; and (6) win Rookie of the Year in MLL.
Hate all you want; we’ll win more.
Martin
We’ve done microloans with the kids. If they get a bit of money from the grandparents, or some such, we match and put the sum in a microloan – from a site where they learn something about where the money goes and for what purpose.
The kids learn something about savings and interest. They learn something about life in another part of the world, and often about an activity they knew little about. They feel good about what their money is being used for and they come to realize just how good they have in the US – that an 8 year-old kid gets enough money from Nana for Christmas to help a woman in Bangladesh support her family.
Mark
Microlending, as far as I’m concerned, is total horseshit. I can’t tell you how many of friends have been so excited because they dropped 100 bones into Kiva and got their money back a few months later. They don’t like to think that it was lent out at 30-70% in the developing world.
The Grameen bank doesn’t lend at rates like that – they’re much, much lower, and Yusuf is incredibly critical of the higher rates. One of the big issues is the lack of reasonable lenders in the developing world. Essentially, Americans put $100 into the tank, and some loanshark takes a 30% cut.
Of course, microfinance is well-loved as a *fundraising* technique because it does a lot better than simply asking for donations. Too many people just want money…But very few people have a creative way to put it to use.
300baud
Regarding for-profit microlending, it’s not necessarily a terrible idea. Microlending has been capital-constrained for years, partly because ragtag non-profits have a hard time accessing capital markets. So for-profit companies getting into the business could possibly mean a lot more people taken out of poverty.
It’s important to understand that until microlenders came along, the real alternative was dickensian local money-lenders, charging 100% per year or more. Microfinance institutions charge less, but still a lot by western standards, and use the excess to support borrowers and expand their operations. So even for-profit microfinance outfits may be a big step forward for many borrowers. But yes, it’s worth keeping an eye on.
Regarding doing it in the US, friends in the field tell me it has been tried with little success. Capital requirements for business are much higher here. And more importantly, microlending works by making use of the strong social networks in rural villages to ensure compliance and payback. Repayment rates of 99%+ are the norm. Americans, especially poor Americans, have a lot less social capital.
PhoenixRising
I thought social capital was the networks that make poor people in communities less bad off than bald numeric measurements would lead you to expect. But maybe I’m confused.
As I’ve worked for the US branch of a microfinance lending NGO, I do have an opinion based on that experience: Microlending can sometimes work in US culture, but it seems to work really well (as measured by repayment rates and borrowers who are able to leave eligibility for means-tested assistance) in cultures with a strong sense of community and a value called ‘face’.
We’re not so strongly connected to our relatives and neighbors that we would feel shame if we failed to repay a debt. And there are a lot of great things about our cultural tradition of just walking away, but lack of embarrassment or a sense of responsibility to the community hits the hell out of your default rates.
To the question ‘Can the banksters make their vig on 22% loans to poor people in Bangladesh?’ I ask only, ‘Can they outsource the management to India to keep the costs of lending at 2%?’ If so, everyone really does win. Because it’s not a matter of, Use your least-favorable credit card to stock your shelves, OR try this totally rapacious interest rate, to storekeepers in Nairobi. They are just hosed by the local moneylenders.
PhoenixRising
Shorter:
Right, because no one in Bangkok gives the moneylender her 14 year old when she can’t make the payments to cover her inventory.
That doesn’t happen now…or at least when it does, Duke and Western investors have clean hands, and that’s what matters. Like sweatshops, private microlenders may suck compared to the EU-approved version of the same function, but are pretty good compared to the local version, for many values of ‘local’.
Felanius Kootea (formerly Salt and freshly ground black people)
@Violet: Kiva makes microloans available to Americans (most loans are to people in developing countries but I’ve made loans to people in San Francisco and Atlanta). I know for a fact that Kiva suspends microlending partners that make too high a profit off their customer base, because all loans from one country ceased when the only microlending partner was shut out by Kiva while they investigated US-brought charges of usury. It didn’t matter that the borrowers in that country were ready to pay even those high rates because they’d never be able to get similar amounts from regular banks.
williamc
There are micro-lenders all over this country.
There is a great one here in Atlanta that I work really closely with everyday in the course of my own work (non-profit affordable housing).
The Atlanta Microfund is very well-run, has a very low default rate, and serves a mostly minority community here where credit is hard to come by. They get most of their capital from NGOs and the Small Business Administration though, so I don’t know if its typical of most on-the-ground micro-lenders in the US, but I know that personally, the staff (or the two people that run it) are neither money-grubbing capitalists nor scheming banksters, but I guess we all have the potential there to do it. Money changes everyone.
AxelFoley
@burnspbesq:
Including me. Fuck Dook.
Duncan B
I’m a long-time Balloon Juice fan but a rare commenter, since y’all typically are better informed than I. But I know a thing or two about microfinance; I have some work experience in the area. Like fire, MF is a tool, one that can help you or burn you. MF lending rates are often worse than the mafia’s; this is a fact of life that has to do with the fact that monitoring a $100 loan takes as much time as monitoring a $100,000 loan. So small loans end up costing more to administer relative to the size of the loan. For that reason, it may make sense to let private actors- even for-profit actors – take up the cause. Private lenders have stronger incentives to develop efficient, cost-effective lending mechanisms. Also, a successful for-profit MF doesn’t have to worry about the largesse of a grantor to stay in business. Finally, for-profits have a strong incentive not to break the backs of their clients: they want to stay in business, after all.
Comrade Dread
Of course that’s where it’s headed.
They’re running out of underpaid Americans to offer credit to, it’s only a matter of time before they expand the debt markets further.
Glidwrith
@The Other Chuck: Prosper was actually shut down for a whole year, along with at least one other called Lending Club. What’s really cute is Prosper changed the rules about who is allowed to lend to borrowers: as long as you have less than $2500 invested you have to have a net worth of $25,000 and you don’t get to count your house as part of your worth. More than $2500 and you can invest no more than 10% of your net worth. How many people have $25,000 tucked away in their savings accounts? I think it basically destroyed most people’s ability to do person-to-person lending and made it into a rich man’s game. Personally, I think these sites were threatening the banks too much and they put in regulations designed to eliminate them.
Oh, and Lending Club? I understand from someone else that to participate, you need $1 million.
Thursday
I’m a huge fan of Kiva, and have been lending there a couple of years. I’ve currently got about $600 tied up in it, but have never lost a penny or made a cent in profit. The final lenders are local groups, and those people do make some profit, but they also take on the risk well beyond what I do, so fair enough.
m
Grameen America opened up a couple of years ago.
In terms of Grameen in Bangladesh, I remember reading that many borrowers were using loans for food or immediate needs rather than investment in their businesses.