The world learned about microfinance in 2006 when Muhammad Yunus, founder of Grameen Bank, won the Nobel Peace Prize. For several decades, the bank had been helping people in Bangladesh rise from poverty by giving them tiny loans, most under $200. Now the Bank has $520 million in outstanding loans to small businesses in poor countries.
Microfinance—offering loans, savings accounts and other basic financial services to the poor—has proved to be a critical lever in helping people to help themselves. A woman might borrow $50 to buy chickens so she can sell eggs at the local market. She can sell more eggs as her chickens multiply, and soon she can sell the chicks. She shares knowledge with her neighbors, creates jobs and raises the standard of living for the community.
Women receive the most loans because studies have shown they are more likely to reinvest their earnings in the businesses and in their families. They also tend to take fewer risks with their business and are more careful to repay loans. Whereas only 4% of the poorest people in Bangladesh pulled themselves above the poverty line without credit services, 48% did so with loans from Grameen Bank over an eight-year period.
Says Tracey Turner, founder of the online microfinance marketplace MicroPlace, “For these women, having access to money to start a small business isn’t about fulfilling a dream, it’s literally about keeping their families one step ahead of starvation and putting a roof over their heads.”
The World Bank estimates there are over 7000 microfinance institutions serving some 16 million people in developing countries with $7 billion in outstanding loans—97% of which are repaid.
High-profile microfinance investors include eBay founder Pierre Omidyar and Sequoia Capital, the venture capital backer of Google and YouTube. About 40 funds give institutional investors and high net worth individuals easy ways to invest. Still, with all this activity, microloans are servicing just 10% of the potential market.
That’s where the Internet comes in—everyday people can now invest through websites like Microplace.com and Kiva.org, where individual investors connect to borrowers looking for capital. You”ll find photos and descriptions of borrowers wanting to buy a cow to sell milk, a rickshaw or a sewing machine to mend or make garments. Launched in 2007, MicroPlace is owned by eBay, and is an online brokerage specializing in socially responsible investments that alleviate poverty. Unlike charity, investors earn a rate of return (averaging 2-3%) while empowering the poor to work their way out of poverty. In the short time MicroPlace has been operating they have enabled 30,000 loans, amounting to over $1.5 million in investments.
Kiva operates similarly in that investments go to microfinance institutions. Investors, however, make zero-interest loans, so although they get their money back, they don’t earn interest. A broker-dealer license is necessary to allow people to earn interest.
Says Ashwini Narayanan, the general manager of MicroPlace, “Peoples’ investment wallets are much larger than their donation wallets. You can spend a lot more money if you know you’re getting it back.”
If you invest $100 on MicroPlace, you have the option to receive monthly or quarterly interest payments, or you can re-invest and compound your interest. You”ll receive notifications about how the organization you’re investing in is doing, including stories from the field and the impact of your investment over the two- or three-year term you’ve selected. Although a 2-3% return may seem small, Narayanan says investors consider both the social and financial returns. A risk-adjusted 3% rate is pretty good.
But Are They Green?
Investors can search for potential borrowers to support by geography and loan terms, but how would we find green investments? The microfinance model itself is a sustainable business model because it’s about people helping themselves to rise out of poverty, explains Narayanan. “In Nicaragua, where I visited recently, there are very forward-thinking microfinance organizations. They believe the country’s ability to get out of poverty is through farming. They give out many loans for agriculture and teach sustainable practices. Borrowers get better rates if they’re willing to employ green practices.”
Education for many microfinance institutions is on healthcare, literacy, figuring out a business plan, helping borrowers learn how to manage money—the basics. A common theme for most is concern for the environment and education.