The Online Microcredit Lending Revolution

As someone interested in issues of global poverty, development and aid, I am of two minds when it comes to microcredit: the lending of small amounts of money, mostly to women, in the poorest countries in the world, in order for these women to start a small business and become self-sufficient. As is now well-known, microcredit was initiated by economist Muhammad Yunus of Bangladesh, through what is not the multimillion dollar Grameen Bank. Yunus’s efforts were rewarded by a Nobel Prize for Peace.

Since then, microcredit schemes have expanded and many program now exist in various peripheral countries, some for-profit, non-for-profit. One such organization is Kiva, an online microlending organization made famous by Bill Clinton in his latest book on giving. As this report from the Integrated Regional Information Network (IRIN) states:

Kiva offers investment options that appear to revolutionise the interface between giver and receiver, lender and client. According to Jonathan Morduch, co-author of The Economics of Microfinance, “Kiva and the micro-finance world are set up not just as a better way to fight banking but also an important way to rethink traditional modes of giving and global social justice.” (…) was co-founded in 2005 by Matt and Jessica Flannery as the “world’s first and only online micro-lending opportunity”, teaming up with international organisations working in low-income communities. It lists 61 partners in 37 countries that are responsible for deciding which borrowers will be posted on the website. The loans are disbursed to the partners – local MFIs – for ultimate disbursement to the borrowers.

While browsing through the site, a potential lender sees brief descriptions of the borrowers, making it easier to create a connection with one or more entrepreneurs. By using the internet, Kiva claims to have reduced costs.

It appears that many “ordinary” people are choosing this route, perhaps over more traditional methods of donating money. As of 13 November 2007, had raised $14 million from 142,000 people to fund 20,769 loans – and the count changes daily. That represents a sizeable amount of cash from a large number of people who, more likely than not, did not previously know about micro-finance or MFIs.”

Of course, microlending is not without its critics for both side of the political and economic spectrum. The major objections to microlending?

  • Higher than average interest rates
  • Private microlending becomes a convenient substitute for public policy
  • Slim evidence of effectiveness
  • The issue of whether or not loans do reach the poorest of the poor and whether these loans really stimulate self-sufficiency
  • The neglect of the macro-economic and social causes of poverty in favor of micro-solutions

From the evidence we have, it seems that microlending can be profitable but the jury is still out as to whether it does alleviate poverty sustainably and over the long term. However, most of the objections listed above tend to assume that microlending should be the panacea, the perfect remedy to absolute poverty. It is not and I don’t think Yunus ever pretended that he had found the perfect solution. It is possible that governments in poor and highly-indebted countries might use any form of foreign aid as a way to avoid poverty-reduction policies. But at the same time, we know that the rules of lending tie their hands in many ways.

So, no, microcredit is not the silver bullet. Unfortunately, there is no one solution to solving absolute poverty problems. That requires a multifaceted approach. Microlending is one tool in the toolbox, it’s not the only one.

In the meantime, Kiva is an organization well-worth checking out and supporting. With loans as small as $25, what do we have to lose?