Your $25 can Start a Business, Change a Life
Monday, April 7, 2008
By Jen Haley
Lovisa Asinde is a Ugandan widow who supports herself and her five children selling food. She started the small business eight years ago, and planned to open a larger restaurant in the center of her town.
But when one of her children fell ill she was unable to work, and she lacked the $500 needed to buy saucepans, plates and food staples.
So, strange as it may seem, Asinde went looking for international investors. She found several.
New Yorker Bill Gilroy invested $100 in her business along with eight other investors from as far away as the Netherlands.
Gilroy has never met Asinde. In fact, all he knows about her he found on Kiva.org — a Web site that connects entrepreneurs in developing nations to investors in the United States and abroad.
This is microfinancing. It allows everyday people to invest as little as $25 to help people in developing countries climb out of poverty. The concept of microfinancing is nothing new. At its essence, it’s making small loans to the working poor. The loans are used to establish or expand small businesses to help families earn more money.
The industry’s assets total about $34 billion, according to Microfinance Information Exchange, and there are as many as 10,000 microfinancing institutions — known as MFIs — around the world, according to Microcredit Summit Campaign, a coalition of advocates, donor agencies and educational institutions. Some of the industry’s contributors include Citigroup, Morgan Stanley, TIAA-CREF and J.P. Morgan.
Premal Shah founded Kiva three years ago. The Web site posts profiles of entrepreneurs from 80 countries looking to start a business. Visitors can click through the pictures and personal stories to choose the business they want to fund, whether it’s a dairy farmer in Bolivia or a young woman in Peru who wants to open a grocery store.
The entrepreneur generally repays the loan within six months to a year, the company says. During repayment, investors can see individual progress reports as they are posted to the site.
The investor doesn’t receive interest on the money, but Shah says Kiva lenders usually don’t want to earn a rate of return.
With MicroPlace, on the other hand, people loan money to the working poor through the Internet and receive a small amount of interest.
Lenders for the eBay-owned MicroPlace purchase securities instead of funding individual cases. The money generated by these sales is invested in microfinance institutions around the world. These microfinance institutions, in turn, find the entrepreneurs, make loans and collect payments. Most loans are paid off, with interest, within one to four years, according to MicroPlace founder Tracey Turner.
Contrary to expectations, repayment rates for microfinancing are high: Kiva’s repayment rate is about 97.2 percent, according to Shah, and Turner says the historic repayment rate on microfinance loans in general has averaged 97 percent.
That’s because people respect their obligations, says Peter Hall, the director of the Microfinance Information Exchange.
“It’s not a society where people are very mobile. It’s very family-based, community based. People aren’t flight risks. They are grounded in a certain time and place. They do everything they can to improve their place in society,” he says.