Micro Lending
My kid brother gave me a wonderful christmas gift - a gift card to do micro lending with Kiva. You can check out my portfolio and follow my adventures.
Kiva is a great prototype - but would love if the system could be more P2P than the current implementation - which is more of an add-on to existing instutional micro lending systems. (a lot of transaction costs that could be taken out of the system).
January 2nd, 2007 at 3:06 pm
Check www.prosper.com - it’s not focused on development projects (it’s oriented to US-based borrowers), but it’s much more P2P-like than Kiva.
Based on the financial status of the borrowers on Kiva, I think it might be difficult to lower transaction costs. Barriers include the price of internet access, language and communication difficulties etc. - I think an institutional partner may be needed, especially if the goal is to reach the working poor.
January 2nd, 2007 at 3:27 pm
Prosper is great for p2p lending in modern credit rated situations (also check out the british pioneer in modern p2p lending Zopa).
A partner is definitely required due to the issues you describe - but the role of the partner changes in a p2p context - and kiva currently just runs on top of the normal local micro lending schemes.
(just an example borrowers still pay normal micro credit interest rates of 10-20% to the local partner even though the funds have been sourced at zero interest rate, trust/reputation is only connected to the local partner and not to the shared marketplace that could led to borrowers building up reputation directly leading to low interest rate loans in the future, etc.)
January 2nd, 2007 at 11:02 pm
I agree completely on the changed partner requirements, but it will be extremely difficult to build something like that on the scale required - including local presence in X number of communities worldwide. Most likely the partners to emerge quickly would be partners in larger cities, which would not solve the need for micro loans in rural communities. A marketplace approach might be an idea and provide incentive for partners to emerge organically, but provides the added challenge of evaluating these partners - some kind of “checks and balances” approach is probably needed in addition to a pure buy/sell marketplace built on trust.
While the marketplace is pretty interesting from an entrepreneurial view, I’m sceptical at how effective it would be in terms of directing capital to those more in need of it. It seems that there might be a preference for micro loans going to borrowers that are better able to “sell” their loans by talking up their micro business, but perhaps I’m just overly cynical.
But, neat concept, none the less.
If nothing else, it adds an element of transparency for private donors. (I wonder how much of an additional overhead it adds for the local partners!)
On a whole other level, micro lending probably isn’t the cure to the world’s poverty problems. While Grameen is a succesful operation (at least from a lender’s point of view), it’s interesting to note that many of its borrowers are repeat borrowers (who sometimes borrow for sustenance rather than micro busines financing). Also, micro credit has the danger of turning the poverty alleviation debate into a “privatized safety net” debate (”the market will fix it”). So far, micro credit has not changed income distribution in any country I’m familiar with, even if it has (perhaps in a case of lending masking as charity) provided sustenance and helped people build tiny businesses.
January 3rd, 2007 at 5:02 pm
Thomas!
Thank your brother for showing me a great way of helping, and thank you for telling the rest of us about it.
January 4th, 2007 at 2:10 pm
Jakob i think we agree somewhat.
I think the interesting part is that the local agent wouldn’t need the financial capability/legal infrastructure/etc. like in the current system - but could focus on the core competence of determining trust on the local level.
IE. i would borrow to someone without credit history directly if it was handled by a local agent that would get a commission for taking the borrower under his/hers wing and taking the risk of getting a bad rating if the person defaults.
That there’s no data in microcredit changing income distribution seems unlikely to me - is that really true?
January 4th, 2007 at 8:31 pm
Yep, I think we agree generally on the first part of it, although I’m still sceptical in terms of the ability to build a network of local partners quickly, the overhead that the “selling” of loans to the “market” will add etc.
In terms of the income distribution… I’m not an economist, but there are a few issues I’ve come across. First of all, microcredit is still relatively small on an absolute scale. As such, even though microcredit has the ability to increase growth for the poorest part of society, economic growth in absolute terms is still much higher for the richest part of the population, making it difficult to measure the effect, especially in terms of income redistribution. On a national scale, the impact of micro credit is very low. I’m not saying that it doesn’t have the capability of changing this picture if it is used on a larger scale, just that today it’s very small.
Second, you have to keep in mind that income and wealth distribution in many developing countries is extremely skewed. As such, if the goal is to (re)distribute wealth and income in a more “fair” way, some kind of structural reform will probably be necessary (I don’t know of any example of wealth being redistributed without some form of structural/state mechanism in place - the market won’t fix it on its own). The challenge with microcredit is that it is talked about as the end-all solution to poverty alleviation, providing an “easy way out” - “don’t worry, microcredit will fix it”. Microcredit will certainly help, but income redistribution with a larger impact will require more than 100 dollar loans.
Check http://en.wikipedia.org/wiki/List_of_countries_by_income_equality for a view of income (in)equality around the world.
February 12th, 2007 at 3:34 pm
Thomas,
Since you have mentioned Zopa and Prosper… P2P lending is coming to Denmark… We are now at the public test-drive (or beta;) and you are welcome to check it out at www.FairRates.dk
Arkadiusz/FairRates.dk
February 20th, 2007 at 2:14 pm
[…] Updated: Our friend Thomas Madsen-Mygdal has sent a link to a discussion about other p2p micro lending sites from his blog! It is interesting to see how others are thinking about this topic. Tim Vang | February 19th, 2007 at 3:38 pm | […]
March 10th, 2007 at 4:57 am
Thomas, I hear Kiva as well… check out this documentary on ‘em that aired recently in the US:
http://www.pbs.org/frontlineworld/stories/uganda601/