Charitable Donation Advice
Charitable Donation Advice is a recurring column here at Change Gangs: Virtual Giving Circles. We educate ourselves about our cause so that our donation makes a big impact on the world. Microfinance was a recent topic at the Poverty Busters Giving Circle meeting.
A Brief Guide to Microfinace
Maybe you’ve heard a little about microfinance or maybe it’s new to you. Because there have been some recent cases of microfinance borrowers committing suicide, I thought it would be a good idea to review what microfinance is, what’s it’s good for, and when microfinance is not a good idea.
Microfinance fills a very important niche.
Many people living in extreme poverty throughout the world do not use a traditional financial institution. They don’t have a “savings” account or a checking account at a local bank. Instead, their savings accounts are their physical assets– their animals; their gold or jewelry; and their stored crops. When they need funds, these goods can be traded. Unfortunately though, these types of items can be stolen, damaged by pests or fire, and aren’t easily exchanged for small amounts of cash. Yes, it’s a savings account, but it’s not very safe and it’s not very usable when someone needs a small amount of money for an immediate need or business investment.
So why don’t they just open a savings account at a bank? For one, most financial institutions are looking to make a profit, and with the small amounts of money involved with the extreme poor, the administration costs are often too high to justify the time and expense. And if the person is looking to borrow a little bit of money to start a new business or expand a current business, again the administration is too much to warrant the cost and the risk.
Microfinance specializes in providing financial services to this type of person. In many cases, this means very small loans in order to help that person start or expand a new business so that they can become self-sufficient and break the cycle of poverty. Kiva is one of the world wide leaders in this type of micro-financing.
What to look for in making a microfinance loan
- The borrower must have the ability to repay. If that person lives in a remote area with very little population then new customers could be scarce meaning that they could not generate additional profits to repay the loan.
- The borrower should not be carrying a lot of other debt. There have been cases where borrowers have taken out too many loans, became overwhelmed with their payments, and committed suicide.
- The borrower should not be risk adverse. Some people make good business owners and some do not. Being a successful business owner requires a personality that isn’t afraid to get out there.
- Interest rates can be high in a microfinance loan, but shouldn’t be higher than the industry standard. Typically, a non-profit microfinance institution can provide lower interest rates because they are funding the administrative costs through donations. Because they aren’t trying to make a profit off the borrower, they can charge lower interest rates.
Do a little research to find out if the interests rates are reasonable and comparable to others in the industry.
What microfinance is NOT good for
- Infrastructure or community resources. If a community needs wells, roads, schools, etc, a microfinance loan will not help bring those things to town. Make donations to other organizations who focus on bringing those type of improvements into communities around the world.
- Training for work skills, business skills, low-self esteem, and literacy. Often these skills are a prerequisite for a person’s success in the world; however, a microfinance loan should help with a specific activity that will generate income. These soft skills, although necessary, cannot be addressed with this type of small business loan. That’s why it’s important to consider the existing skills of the person and the skills necessary to be successful in their enterprise before making a microfinance loan.
Consider supporting organizations that are providing education and job training so that more and more people have the skills to break the cycle of poverty.
Microfinance is an important tool in the fight against poverty, and your microfinance loan can change a person’s life. If you’re considering making a microfinance loan, I know it’s because you have a big heart and want the world to be a better place because you were here. Take a few minutes to research where and how you’ll be making microfinance loans so that your good intentions do good and not harm.