Effectiveness of microfinance in alleviating poverty

[Guest]

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[JohnAtKiva]

The only question is: what does the borrower get for paying the interest rate? and this kind of informatin I'd like to see prominently listed by kiva - eg:
* what is the exact individual interest rate my borrower is obliged to pay (I am not so much interested in average Portfolio Yield numbers)?
* what services are included (how much administration and paperwork, business training, business plan support, ...)?
* how much does the inflation rate contribute?
* how much profit for the MFI?

I am not a financial expert at all, but I can imagine that this kind of information would reduce the long discussion on usurious interest rates. Maybe it is not so easy to collect all this information, but it is worth thinking .... For my part I'll only lend through MFIs in future where I have received this information ...

Hello Kurt -

Ah ok.  We do display the average portfolio yield, as an important first step.  We've discussed internally how we'd like to, as you suggested, calculate the exact individual interest rate for each specific loan.  To be able to do that, though, we'd need more information then we currently have regarding the individual fee schedules for each loan.  So that's a ways away at this point.

I also think it should be technically possible to display the current inflation rate at the time the loan was disbursed, and adjust the overall interest rate by that amount.  So that's promising as well.

But I am not sure how you could calculate profit per loan.  You'd have to know the cost for the entire MFI and allocate it to each loan on some fairly arbitrary basis?  I've done a number of these cost allocations projects in my life, and have grown pretty skeptical about them the more of them that I've done.  For profit, an overall metric like the Return on Assets number is much more useful, I believe.

Regarding services for each loan, that's an interesting idea and the first time I've heard it suggested.  It seems to me that a higher priority would be calculating the individual interest rate for each loan.  That effort is quite a ways away, since it would involve coordinating with over 100+ field partners.  But individualized interest rates are definitely something that's been discussed internally and that I personally would like to see prioritized.

Hope that helps!

Best,
John

[cpbailey]

One thing that microloans sometimes provides goes beyond a simple calculation.  For example, there are educational aspects to some MFIs.  If a woman learns how to stand up for herself or her children in a society where women have few rights, how does this get calculated?  The child may get medicine or stay in school because mom feels her voice has value.  If a woman gets low income Pap smear which can be treated, how does one calculate the value of access to this medical privilege?  (Promujer of Bolivia doctors for healthy female checkups!)  If a single person learns how to avoid AIDS, this is not something banks here provide. 

Colette

[AccountAbility]

Regarding services for each loan, that's an interesting idea and the first time I've heard it suggested.  It seems to me that a higher priority would be calculating the individual interest rate for each loan.

John, while perhaps not a part of the metrics discussion, it would be helpful to have a summary block on the Partner page summarizing the services "typically" provided to borrowers, over and above the loan.  The list is probably not exhaustive, so it could be almost a checkbox response from the Partner, but would remind lenders of these other factors.  (Even regular Kiva lenders get a little fuzzy as to which MFI Field Partner does what in these extras.  Colette's reminder is just one example.     )

Dan

[cpbailey]

Perhaps in the country of the month, highlight great features of the country's MFIs on Kiva.  Alternatively, one could feature on the front page really great features of MFIs with loans that tend to linger.

Colette

[greg3912]

Here's a short commentary from MarketWatch site. I find it interesting that financial media is talking about microfinance as a tool to stabilize the US economy. What a third world we live in.

A lending model that could alleviate povertyCommentary: Grameen America leverages community with microloans

By Thomas Kostigen
SANTA MONICA, Calif. (MarketWatch) — “If we change the banks’ mind, the whole world will change,” wrote Muhammad Yunus at the opening of Grameen America’s New York City branch last year.

His timing couldn’t be better. Yunus’s Grameen America bank is betting that what worked on the streets of Bangladesh can work in the United States.

Grameen America provides small loans, known as microloans, and other financial services to individuals living below the U.S. poverty line who want to grow a small business.

As people occupy Wall Street among other places in the country in protest of the increasing dichotomy between the rich and the poor in America, and as the number of people living in poverty grows to record levels, a “Third World America” — as Arianna Huffington puts it — is indeed developing before our eyes.

Financial instruments geared to the less well-off should therefore be in high demand and should be looked at seriously by investors. In fact, it’s exactly these types of vehicles that the “occupiers” on Wall Street should be embracing to effect change.

Blocking traffic is one way to gain attention, but that isn’t going to change much, if anything, about the economy; Grameen’s system would.

Here’s how Grameen America works: An individual who lives below the poverty line selects four others in the same predicament and forms a group. Sponsored by Grameen America’s bank, the group goes through a five-day financial training program and opens a savings account.

Each borrower gets a small business loan — no collateral or credit history required. Weekly group meetings are held with a credit manager. The borrowers begin to repay their loans and deposit savings.

Over the past year more than 7,000 loans have been disbursed totaling $24 million.

Pulling people out of poverty and putting them on the right track to financial success can shift the economic landscape. By leveraging community, the plight of the poor can change. And boy is it in need of change.

Almost 50% of the income earned in the United States goes to the 20% who make the most, according to recent Census Bureau data. Meanwhile, the number of people living in poverty in America exceeds 15% of the population — the highest poverty rate since the census began tracking incomes.

Most disturbing is the number of people living in “deep poverty,” defined as 50% below the poverty line. At nearly 7%, it’s the highest level on record in the U.S. The poverty line is defined as a household of four living on less than $22,113 per year.

 
What Grameen also does, if you pay close attention to its model, is leverage community. They found when borrowers are in a group and held accountable to their peers, their repayment rates increase.

Community-based lending sites such as Prosper.com have also found success using this model.

As social network sites lap up people around the world and arm them with information and the kind of education that incites them to revolt, the powers that be ought to rethink the way they run their financial kingdoms.

Decentralizing the financial structure and lending more power to the people, through community and peer-based programs, may allay the fears of aristocracy sweeping America today.

If enough dollars are invested in the bottom of the pyramid, it will stabilize the U.S. economic foundation and begin to point the country in the right direction again.

The days of high finance are over, and it’s the dawn of microfinance in America