The Odd Case of Charity Lending
I would ask what hole you are living in if you don’t know what micro-lending is, except you may see, soon, that I would like to join you. Basically micro-lending is set up like a charity where you give money to someone, but you know who it is, what they are trying to do, and you expect them to pay you back. This is so you can lend again, and again.
Let’s take Kiva for example: It has funders, like me, who put in $25 per person to fund an enterprise (farmer, banker, mechanic, store owner, etc.) Kiva takes this money and forward it to in-field institution, Field Partner, who is responsible for distribution and collection. The debtor pays this loan back and you get a portion back until the entire loan is paid. If you have multiple “investments” in your “portfolio” then you may get the $25 to relend sooner and be able to add to your portfolio.
This is great for a few reasons: you are getting capital investment to parts of the world that want to make things better and you have a tenuous but real connection to people around the world. But there are a few issues:
Kiva derives its funding from donations by the funding users. Essentially this makes it a charity, merely a way to funnel capital to other parts of the world. But this means that Kiva is always asking for donations, and if you aren’t adding money then you will at some point not have enough to make an investment.
Oh yeah, you won’t have enough money because you aren’t receiving any of the interest from these investments. It’s a charity, not true investment. Add to this that the fact a borrower can default, and then you lose the rest of the un-repaid amount. What happens to the loan? What does the Field Partner do, just leave it be? If there aren’t some strings attached, then every borrower would figure out the amount of a grant they need, get a loan and then default. Of course they can’t apply again, but a few thousand free dollars in a third-world country could certainly get you quite far, whether or not you are setting up a business for success.
So there must be something more that Field Partners can do to enforce a loan. But if we can consider the remaining amount as lost to us, the lenders, where does it go? I don’t like either implication.
And lastly by making people in debt to us, we are essentially spreading America’s idea of how to get ahead. Which is great in some regards, but really it’s just become how to get money for the things we “need” to buy, speaking as someone with a mortgage. We are in debt to many people, and as Americans are not as good about paying it off as the rest of the world. But let’s spread that idea to other people, so maybe we don’t feel as alone.
One thing that I have been wrestling with as a Christian is that we aren’t supposed to make money from usury, which is more specifically lending at unreasonable rates. So definitely not credit card lender… But what is an unreasonable rate? Of course we are not making an unreasonable rate from the transaction, but some of the Field Partners may be charging going rates in those countries, which by current American standards could be considered highway robbery. But back to who to lend to.
It really depends on the situation. With friends and family, unless you have a codified contract, in most cases you should only be ‘lending’ about as much as you would be willing to give away. And never co-sign. The idea here is that unless you are actually going to be a part of a business venture, you should expect it never to come back. Of course you don’t have to tell them.
Another case is absolute poverty, or extenuating circumstances. Lending money to a region that has no money isn’t going to help, how is the borrower going to pay back the loan if nobody else can pay them? War zones too, if someone can turn around and pay you back tomorrow you might very well get caught up in something very bad.
Now here comes the hard part, lending money can actually spur growth with the right business and in the right area. That is the idea of many of these micro-lending entities. The problem is how do you jump through hoops of actually lending money abroad without all the tax implications? You make it a charity. Good, but also not good. There is no way, as explained above that this will ever work out for you, the lender, other than just to feel good.
So I am becoming more convinced that we should be looking at traditional investing, idea investing like Kickstarter, and true charity rather than attempting to blend charity and debt. I would urge you to stay away from debt in general, but in some cases it can be useful to bootstrap ideas, or buy mundane possessions.
I would like to see something similar to Kiva except that we are actually investing and receiving returns, not just enough to lend to the next one, but enough to slowly grow the impact that we can have. Of course there are many regulatory issues with this, but it may be worth it, spreading a *slightly* better idea from the US.
Kiva is not Quite What It Seems
The Joy of Pretending...
Wikipedia: Microfinance - 5/5/2017
And I might be a few years behind the curve. Hopefully not with my stories.