On the way to the coffee shop today, instead of listening to a podcast I turned on the radio and heard an interview with the founder of Kiva.org They’re one of several micro-lending organizations making it easy to lend money to entrepreneurs in developing nations.
Instead of being a gift, loans are paid back with 0% interest, and the money can then be withdrawn or given to someone else. The premise being that helping people to become self-sufficient is better than simply giving charity.
It’s working. The Grameen bank pioneered the model in 1976 and has loaned out over six billion dollars so far. Interestingly, their loans go mostly to women, who proved much more likely to pay back the loan and to spend the new income on their families.
Kiva.org brings the internet into the equation, allowing lenders (you! me!) to participate with amounts as small as $25. Larger loan requests are spread across many people, minimizing everyone’s risk. For example, while I’m happy to help Juma Rahimov towards the purchase of two cows, lending him the entire $800 he needs would require more serious research.
I’d want to meet him, but he’s in Tajikistan. I’d want to talk to him, but he probably doesn’t English… Luckily for me, 96% of loans are repaid in full, and since I’m only lending $25 if Juma can’t pay me back I’ll be alright.
I found myself most interested in loans that might get people over a specific problem that’s holding back their business. For example, Cecilia Tettey in Ghana buys corn from farmers and sells it to retailers in the city. She needs better transportation, which could really big boost for her business if it meant more trips to the city or less time spent on the road.
It’s interesting to try thinking like an investor. Along with the text, you find yourself studying the pictures for clues. Would this person pay back the loan? Do they look honest? A hard worker?
In the end we can’t help but be influenced by the images. Somehow the man above reminds me of my father-in-law. And my friend Ross who always stops to help people with car trouble. Heck, even the fact that he’s working in the cold makes me want to help him.
Traditional economic theory is all about rational decisions. Spreadsheets and calculators. Lending like this is interesting because it can’t be done rationally. You just don’t get enough information. A picture, a paragraph or two and your gut. That’s it.
Somehow the lack of perfect information makes it fun. With more information I might find myself trying to calculate return on investment. Instead I find myself thinking “holy smokes lady! That corn looks heavy. Maybe this loan will help you buy a truck.”
What do you think, is this the future of giving? Would it change the equation if the rate of return wasn’t 0%?