So far in this series, we’ve covered free methods that can positively contribute towards global health that range from a simple search engine click to walking a mile, but what happens when we start incorporating our hard-earned money into the equation? Can the $25 we have to spare actually be put to good use? Thankfully, the answer is yes. From here on out, we’ll be exploring all the different ways we can use our own capital towards positive outputs.
We’ll see how our direct investment into entrepreneurs in less-developed countries creates an exponential impact on society. We’ll see how money given in the right way can cut through bureaucracy and the limited perspective we have as “western saviors” and the end user can use benevolence in the most effective way. We’ll see how subsidizing the right services unlocks a fountain of potential as market failures are corrected. And finally, we’ll see how our own long-term investing can be channeled in a way that provide us with financial stability while steering financial markets towards more ethical ends.
Today, however, we’ll be focusing on the concept of microfinance and how a $25 investment today can turn into over $100 in social impact within a couple of years. Most importantly, all this can be automated and minimal involvement will be needed to put this into motion.
Back in the 1970s Bangladesh was a new country emerging from the impoverished region of Pakistan. This densely populated and poor country was hanging by a thread and in its 3rd year as a recognized nation, massive flooding and other disruptions caused one of the worst famines in decades. Out of this desperation, two organizations emerged: BRAC & Grameen Bank. They both approached extreme poverty as a symptom of broken markets rather than a cause of an inept society. Dr. Muhammad Yunus, the founder of Grameen Bank, famously lent $27 to 42 individuals who were trapped under loan sharks. He concluded that many of these people had the capacity to generate income and to pull themselves out of poverty, but they lack the market resources like banking services, loans, insurance, telecommunications, etc.
Fast forward to today and Yunus’ theories has given to a new branch in Development Economics with the field of Microfinance. Microfinance has led to tens of millions to progress out of extreme poverty over the past thirty years, resulting in Yunus & Grameen Bank receiving the Nobel Peace Prize in 2006.
As microfinance has begun to mature, new innovations have entered the field so that crowdfunding has now become a viable method of generating loans. Instead of a bank giving out $1,000 to a farmer to buy more chickens and repair the coop parameters, we all have the capacity to chip in at $25 a piece to pool together $1,000 towards that loan.
Crowdsourcing allows individuals to contribute towards constructive loans that build people up rather than hold them down. But why this mechanism may be relevant to you is that not only can you make an impact with a given loan, but by the very nature of it being a loan provides the opportunity for exponential impact. When that $1,000 is paid back a year later, all that contributed towards that loan get their $25 back, which gives them the opportunity to take that same $25 and contribute to another loan; effectively doubling its impact. If they keep it up, that same $25 will continue to be recycled over and over again; being passed onto the next person who can use it grow their own individual capacity.
Let’s now look at two organizations that provide this kind of service.
Kiva is the world’s largest crowdfunding microlending platform that to date has lent out over $1 Billion in loans across the world. All you have to do is set up a quick account, and put in a minimum of $25 into your lending account. From there, you can browse all the open loan applications. These applicants from across the world write about their background, what they are intending on using the money for, how much they need, and for how long they’ll need it. Then just like GoFundMe, a community of lenders all pitch in at $25 a piece to fill the loan. It’s a set and forget system where if the loan is successfully filled, you will receive periodic payments back into your account. Your loan contribution does not carry interest on it, you’ll just get your principal back. Once the loan has been successfully paid back, you have the option to cash out your account and get your $25 back, or you can just turn around and find another loan application and use that same $25. It’s a quick and easy way to make a direct impact in someone’s life that comes with little financial or time commitment.
Full disclosure, this is not a pure lending system. While you are contributing towards loans, what you are actually doing through this is backing the loan. Since microfinance is a very hands-on and labor-intensive practice, Kiva didn’t have the infrastructure to directly lend to these borrowers all across the world, so they did the next best thing. Without turning this into a full Microfinance course, a major hurdle that microlenders encounter is there are very slim profits to be made from all the paperwork involved for such small loans. When you add the possibility of default to the mix, the risk can be dangerously high. Kiva decided to step in and remove one of those variables.
What is actually happening then is a microfinance firm already met with the applicant, approved a loan to that individual with a set interest rate and payment plan. That firm then writes up the applicant’s story and sends it to Kiva, which then Kiva puts that on their platform. We then crowdsource the amount of that loan and that money is then sent to the microfinance firm and prepays that loan. This allows the microfinance firm to not have to worry about default, and thus can be more willing to make more loans out and also to keep interest rates down since it’s not having to compensate for default losses.
While Zidisha is a significantly smaller organization that Kiva, with just over $14 million in loans made, Zidisha represents a more pure form of what crowdsource microlending can look like.
Instead of just backing loans for microfinance firms, Zidisha is a comprehensive service that connects borrower directly with the lenders, lenders can receive direct updates from the borrower on their progress and share the success stories that the loan provided the borrower. The borrower is paired with a mentor and they set up an online application, which then the loan is crowdsourced by a group of lenders. But where it gets interesting is that the only interest that is charged to the borrower is a 5% service fee, and roughly 15% of the loan is held in an insurance fund to protect the lenders in the effect of default. If the loan is paid back on time, then the insurance funds are returned to the borrower.
What also sets Zidisha apart is its Impact Investor platform. When you use the Kiva program to make a loan, you have the option to get your money back after the loan has been completed, but there’s no financial benefit for you, it’s just a net zero transaction. But through Zidisha, if you sign up as an Impact Investor, you waive your right to the money you deposit. In doing so, the money will be permanently recycled through the lending platform, but this also means that it can treated as a donation. If you use the Impact Investor account, then you can get a tax deduction on all the money you contribute to lend.
My favorite feature Zidisha has is the auto lending method. While it is great to read the stories of the applicants and to actively choose where I would like to support, I do find the act of searching and deciding who I should lend to be a cumbersome and kind of disturbing process. I don’t like have the power to say one’s need is more relevant than another’s or choosing become the applicant looks more appealing or any other arbitrary reason to decide. Also since this whole topic is about finding easy paths to do good, I find preferable that the whole lending process can be automated. On top of that, Zidisha lets you donate starting at just $1, so you only have to wait until your account gets $1 in loan repayments before it will automatically recycle that into another loan.
Personal example: I’m currently adding $25 monthly into my Zidisha Impact Investor account, and now have a personally contributed $1,040 into my account. Over the three years I’ve been using this site, I’ve taken that $1,040 and it’s currently turned into $4,570 worth of loans. Meaning that for every $1 I’ve put into my lending account, that $1 has been used at least 4 different times by borrowers.
What I hope is expressed appropriately here is that money doesn’t have a defined set value of impact; A dollar to us today is not the same as a dollar to an entrepreneur in Kenya. If we can allow those who can leverage money for more use, then we grow our individual capacity to make an impact. By using micro loans, we empower people today while using a system that allows us to repeatedly use the same financial resource to make empowerment a perpetual act. It may seem weird to lend money to people who are living in poverty, and my next post will provide an alternative to micro loans, while still keeping a high level of impact. But in all of this, I want to continue to challenge your restrictive framework that your resources are not enough to make an impact.