Financing the Poor

Stephen DeAngelis

April 02, 2007

As an entrepreneur, I understand the importance of funding and know how difficult it is to obtain. When I look for funding, I’m generally looking for millions of dollars whereas the poor are often looking for tens or hundreds of dollars. It is often more difficult for them to find small funds than it is for me to find larger sums. New York Times columnist Nicholas Kristof writes about a way that anyone who would like to help these entrepreneurs can get involved [“You, Too, Can Be a Banker to the Poor,” 27 March 2007]. He writes:

“For those readers who ask me what they can do to help fight poverty, one option is to sit down at your computer and become a microfinancier. That’s what I did recently. From my laptop in New York, I lent $25 each to the owner of a TV repair shop in Afghanistan, a baker in Afghanistan, and a single mother running a clothing shop in the Dominican Republic. I did this through www.kiva.org, a Web site that provides information about entrepreneurs in poor countries — their photos, loan proposals and credit history — and allows people to make direct loans to them.”

Unlike most of us, Kristof’s job has the advantage of letting him visit parts of the world where his new business partners are located. Having put his money where his mouth is, he went out to check on some of the businesses in which he has invested. Of one of those visits, he wrote:

“So on my arrival here in Afghanistan, I visited my new business partners to see how they were doing. On a muddy street in Kabul, Abdul Satar, a bushy-bearded man of 64, was sitting in the window of his bakery selling loaves for 12 cents each. He was astonished when I introduced myself as his banker, but he allowed me to analyze his business plan by sampling his bread: It was delicious. Mr. Abdul Satar had borrowed a total of $425 from a variety of lenders on Kiva.org, who besides me included Nathan in San Francisco, David in Rochester, N.Y., Sarah in Waltham, Mass., Nate in Fort Collins, Colo.; Cindy in Houston, and ‘Emily’s family’ in Santa Barbara, CA. With the loan, Mr. Abdul Satar opened a second bakery nearby, with four employees, and he now benefits from economies of scale when he buys flour and firewood for his oven. ‘If you come back in 10 years, maybe I will have six more bakeries,’ he said. … My other partner in Kabul is Abdul Saboor, who runs a small TV repair business. He used the loan to open a second shop, employing two people, and to increase his inventory of spare parts. ‘I used to have to go to the market every day to buy parts,’ he said, adding that it was a two-and-a-half-hour round trip. ‘Now I go once every two weeks.'”

Mr. Satar certainly sounds like an entrepreneur. He looked an investor in the eye and talked about expanding. He didn’t even raise the specter of not being able to repay the loan. I suspect his dreams will be fulfilled and Kristof’s loan is safe, hopefully to be invested in another entrepreneur. Kristof wondered how Satar obtained his money.

“Mr. Abdul Satar said he didn’t know what the Internet was, and he had certainly never been online. But Kiva works with a local lender affiliated with Mercy Corps, and that group finds borrowers and vets them. The local group, Ariana Financial Services, has only Afghan employees and is run by Storai Sadat, a dynamic young woman who was in her second year of medical school when the Taliban came to power and ended education for women. She ended up working for Mercy Corps and becoming a first-rate financier; some day she may take over Citigroup.”

Microfinance has proven to be revolutionary in helping bring individuals and families out of poverty. As Kristof points out, the champion of microfinance in Bangladesh won a Nobel Peace Prize for his efforts:

“Small loans to entrepreneurs are now widely recognized as an important tool against poverty. Muhammad Yunus won the Nobel Peace Prize last year for his pioneering work with microfinance in Bangladesh. In poor countries, commercial money lenders routinely charge interest rates of several hundred percent per year. Thus people tend to borrow for health emergencies rather than to finance a new business. And partly because poor people tend to have no access to banks, they also often can’t save money securely. Microfinance institutions typically focusing on lending to women, to give them more status and more opportunities. Ms. Sadat’s group does lend mostly to women, but it’s been difficult to connect some female borrowers with donors on Kiva — because many Afghans would be horrified at the thought of taking a woman’s photograph, let alone posting on the Internet.”

As Kristof highlights, microfinance schemes have principally benefited women. There are several reasons for this. First, they have been targeted because in many places around the globe they have little access to traditional financial services. Secondly, women have proven to be more reliable borrowers. Kiva, however, is an equal opportunity lender.

“Web sites like Kiva are useful partly because they connect the donor directly to the beneficiary, without going through a bureaucratic and expensive layer of aid groups in between. Another terrific Web site in this area is www.globalgiving.com, which connects donors to would-be recipients. The main difference is that GlobalGiving is for donations, while Kiva is for loans. A young American couple, Matthew and Jessica Flannery, founded Kiva after they worked in Africa and realized that a major impediment to economic development was the unavailability of credit at any reasonable cost.”

I prefer the Kiva approach because microloans have proven to be effective in getting money in the hands of truly committed individuals — true entrepreneurs. Microfinance is an important tool in the development kit. It fits neatly with our Development-in-a-Box philosophy because it is standards-based (there are some time proven rules about how and to whom loans are made) and it encourages local participation in communities of practice. Go ahead. Get involved.