Microfinance: Propoor Nonprofits

There ARE ways of making microfinance work even without raising interest rates and truly serving the needs of the poor. One such example is EARN, a nonprofit putting microfinance to work for low-income Americans in the Bay Area. 100% of donors’ money go towards changing someone’s life and are matched twice, by federal grant and Earn Savers program.

Another nonprofit that I can personally ( as I am interning with them) recommend is Color Me In!, organization combining microfinance and tree-planting. Rural Zambian enterprise groups receive microloans for small business development that can be partly repaid by planting trees, 1 tree per 1USD borrowed. As a result, CMI not only empowers the poor, but also helps counter deforestation that has been plaguing the country for many years. CMI is currently raising $6000 to fund two enterprise groups in Zambia. One loan will help fish farmers expand their business, while another will go towards building a community school for 30 orphans. 90% of donations will go straight to support these loans, while 10% will be spent on communications and reporting over the next year. Finally, Color Me In! does not charge any interest rate on its loans in most cases, while in others lets the recipients define the interest rate themselves (which is usually 5-10%.)That is just one example of how smaller nonprofits without much publicity can have much more effective and transparent programs than their big media-loved counterparts.

Heifer International is an example of a different kind of microfinance organization. It gives microcredit loans in the form of domestic animals, such as cows, chickens, and goats. This way famers are not only able to feed themselves, but can also achieve stable income by selling surplus and breeding domestic animals for sale.

Another great nonprofit is Women For Women International that ultimately connects women-donors from the developed world with the women in need in conflict and post-conflict countries. Their Sponsorship Program has truly changed lives on both sides of the world, because as women in Africa, Asia, and Latin America benefit financially and become empowered, women in the US become inspired and happy that they are contributing to a greater cause. Not only a donor knows a recipient’s name, but can exchange letters with her that truly creates life-long relationships.

I was planning to include Kiva.org in my list of microfinance organizations, but, first of all, it doesn’t need much introduction as a top peer-to-peer microfinance organization and, second, I was not satisfied with the interest-rate they charge their recipients: average interest rate among Kiva's partners is 38%. Kiva, no doubt, does create change, yet it could have been much more effective and less bureaucratic.

In the end, the hardest part in identifying effective and transparent microfinance nonprofits is that most of them do not openly state their interest rates and, thus, you have to do an in-depth research. Doing and donating to charity work is not enough, effectiveness is the key if you want to create the most change for your money.

My next post will cover social business as coined and defined by Muhammad Yunus and that may be the long-awaited answer to aid effectiveness.

Microfinance: Helping the Poor or Making Profits?

As I noted in the previous post, there are virtually thousands of microfinance organizations out there nowadays, yet they are not equally transparent and effective. Even more so, some so-called microfinance organizations have trailed-off from the original mission to help alleviate poverty and became regular profit-maximizing businesses that exploit the poor. That is exactly why microfinance movement was started by Muhammad Yunus in 1976: to give people an opportunity to lift themselves out of poverty and break their unhealthy dependence on money-lenders who were living off them.

Mr. Yunus divides all microfinance organizations into 2 categories:

1. Poverty-Focused Microcredit Programs, ex. The Grameen Bank.
These programs charge loan recipients interest rate starting at the market price of the cost of funds up until additional 15% to that price.

2. Profit-Maximizing Microcredit Programs.
These businesses charge more than 15% on top of the market price of the loan and, thus, in Yunus’ words, operate in moneylenders’ territory.

To the defense of the latter, Kiva.org, one of the most famous microfinance organizations, explains why microloans have to have high interest rates. It all makes sense, but in a nutshell, the poor have to pay for the bureaucracy of NGOs, i.e. transactions costs, staff meetings, monitoring, etc. While it is an undoubtedly reasonable argument, for me, low interest rates define an effective microfinance organization, such as Grameen Bank that somehow managed to do so. Another explanation of high interest rates, as Muhammad Yunus notes, is that it helps microfinance organizations become self-sustaining in a shorter period of time. Again a very logical reason, however, the poor should not have to pay for that. Intensify your fundraising outreach, write more grants, what have you. The poor should be nothing but the beneficiaries of the program! Besides, there are other ways of reaching self-sustainability, such as establishing savings accounts for the poor or giving the loans for all the upper classes with regular high-interest rates.

The list of exemplary (and not-so much) organizations based on the criteria I outlined above is right in the next post.

What Faux Pas is really all about

I started a blog because I wanted to talk about something that really matters to me, something I want for others to matter. But then I somehow deviated from this mission and wrote lightheartedly about anything that came up to my mind, which is not bad at all, but not good enough either.

So, from now on I will concentrate on what matters to me and what I would like to matter for everybody else. I will write about the global problems that we, enveloped by the comfort of our lives, do not notice or choose not to notice.

I will write about the modern day slavery (yes, it still exists!), the water crisis, (yes, it is already here), poverty (it is as strong as ever and very much preventable), and the climate change (yes, it is happening now and our day-to-day activities is the reason for it.)

... Because the biggest faux pas there is to ignore all of this, pretending we have nothing to do with it.