Vamshidhar Kommineni

November 28, 2006

Microfinance and

Filed under: Miscellany — Vamshi @ 9:50 pm

Microfinance is the current hot topic of the day what with Mohammed Yunus winning the Nobel peace prize and all. I watched his interviews on Jon Stewart (a few weeks ago) and Charlie Rose (recently). Here’s what he had to say about Microfinance and other related topics:

  • Microfinance is loans without collateral or guarantees for the poor that cannot afford them
  • This is a social & sustainable business, i.e. not a charity but not one that earns money either
  • Grameen bank only operates in rural areas in Bangladesh since the government does not allow it in the cities
  • Poverty is created by the system and poor people only lack the opportunity to rid themselves of it (which Grameen bank and microcredit in general provides)
  • Eradication of poverty is possible. He states that Bangladesh is on track to halve poverty there from 1990-2015
  • Globalization can be good or bad. He believes it is currently bad and corporations and richer countries are taking advantage of the poorer countries ("financial colonization" is the word he used). It needs to be reformed to benefit both¬† parties more equally

Interesting stuff. In addition to what he said, here’s why I think microfinance can and does work better than charitable handouts:

  • It puts an onus on people to repay the loans and be responsible for them
  • Working to pay off their loans in small amounts in turn boosts their self esteem and encourages them to be ingenious. I think this is a deeply ingrained trait in most human beings regardless of race or socio-economic status
  • It educates them about money management for their future endeavors, which is the most important lesson for any small business, regardless of size
  • A prospering small business owner in turn benefits their family and people around them (the irony of trickle-down economics actually working :)
  • From a giver’s point of view, it allows the same pool of money to circulate many times and benefit many people

This isn’t to say that charity is not necessary. There are many circumstances where it is vital. Humanitarian aid in times of war, famine and natural disaster will always be needed. Emphasis on basic nutrition, healthcare and education will also have to be funded without expectation of immediate returns. But I do think microfinance is interesting and is having a big impact around the world, and will continue to do so.

Coincidentally, I watched a really cool program on Frontline World (full segment available as well) a few weeks ago about These folks took the idea of microcredit and tried to establish a more direct connection between lenders and borrowers. Working with partner agencies (starting in Uganda, and now in 11 countries). Using the web, they simplified the process of lending for individuals and exposed borrowers and their aspirations to the widest possible audience. They are also very low overhead, with nothing going towards administrative charges for them (you can donate separately for this). Even PayPal chips in with free transaction processing when you lend through their site. I think this is a great idea, and it seems to be working really well. Most loan applications on Kiva seem to be filled within days, and they just crossed 1 million dollars in money lent. I do have some reservations about their system (mostly around lack of transparency), but I’ll reserve that for a different post.

The work being done by Kiva inspired me to put my money where my mouth is (that’s a first :). I lent $500 to 10 different borrowers (my Kiva page) and I’m going to see how the idea pans out. If I lose the money, I’ll regard it as a charitable contribution and leave it at that. If not, I’ll get to re-circulate the money as it is repaid. I’ll revisit the issues in a few months and if things are looking good, I’ll put more money into the system on a regular basis.

Check out Kiva, if that’s the only thing you click on in this post.

Kiva - loans that change lives

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