Giving a hand up, not a handout

Organizations such as Kiva, United Prosperity and Lend For Peace are making it easier for ordinary people to help eradicate poverty by leveraging the microcredit concept with the power of the Internet.

The strategy is simple. These organizations pair up with established microfinance institutions who work directly with the poor in developing countries to help finance business ideas.

The entrepreneurs’ profiles are posted online and usually include a photo of the borrower, a description of their business and the amount needed. Without collateral, the poor can’t acquire loans from traditional banks. But with the help of these microcredit organizations, anyone can view these online profiles and lend money. As the individual’s business prospers, the money is paid back to the microfinancial institution who, in turn, pays the lender by the agreed upon deadline. Through this setup, lenders are enabling low-income entrepreneurs to earn a living.

As with any business venture, there’s a risk with lending capital. But to put it in perspective, the default rate for microcredit loans is estimated to be between two to five per cent. In addition, repayment rates for microcredit loans are typically much higher compared to an average commercial bank’s repayment rate for small loans. Kiva, possibly the most well-known microcredit platform, reports a 97.88 per cent repayment rate out of over $53 million in ended loans.

From raising $3,500 for a Ugandan pastor who distributed the funds to seven local entrepreneurs, Kiva has disbursed over $100 million in loans within four years. Kiva spokesperson Colleen Smith said the organization’s success owes to people’s genuine desire to help people become financially independent by providing the resources they need.

Peter Schopfer, a teacher in Hazelton, B.C. who lends money through Kiva and United Prosperity, said that in over a year of lending, all of his contributions have been repaid in full. “There’s a chance you won’t get your money back. But the way I look at it, if I don’t get my money back, so what? At least we’ve done our part to share the bounty that we have,” said Schopfer. “Every time I buy a case of beer, there goes my $25. If I can afford to buy a case of beer, I can afford to lend someone $25.”
Bhalchander Vishwanath is the founder and CEO of United Prosperity, a lending site that helps low-income entrepreneurs in India. After working with a company that provided mortgage guarantees, an idea struck Vishwanath.

“I thought if somebody could get a home, a mortgage . . . why can’t we get guarantees for microcredit?” he said.

While in most models the amount contributed by the lender is the same amount disbursed to the borrower, United Prosperity used the same concept to double the funds. “Based on that guarantee, the bank makes a bigger loan to the microfinancial institution and eventually to the borrowers. If you give one dollar, you make two dollars available. And you get your money back.”

Lend for Peace is another similar institution that’s using microlending as a tool to bring peace to the West Bank. Lend for Peace was founded by four individuals from different faith backgrounds.

“We all felt that there’s an economic component to the conflict,” explained Sam Adelsberg, Lend for Peace co-founder. “Microfinance is a really innovative and transparent approach to giving people opportunities and hope for progress. We figured that we can create a system where people can lend online directly to micro-entrepreneurs in the Middle East and make it as transparent as possible.”

Microfinance also introduces a more “bottom-up” alternative, he added. “With microfinance, the entrepreneur doesn’t become dependent, but rather uses the loan to become independent,” said Adelsberg.

Individuals who are trapped in poverty need not only the financial resources but also the confidence to help them regain independence. By providing both, microcredit could be the one tool that paves the way to alleviating poverty.