A Good Run for Your Money
What's the best way to loan a poor entrepreneur $20?
Pardon me, turkey fans, but the real time for thanksgiving is bonus season. It's tough to muster gratitude in November, when you're entering the most hassle-heavy months of the year. Come March, though, the holiday horrors have faded, you've nearly broken the back of winter, and that Big Check is finally in the mail. Hallelujah! Pass the mustard! You'll be flush all through daffodil season—until tax time, at least.
We had a banner year in my household, so I resolved to share the take with some worthy charitable causes. Contrary to popular belief, this does not mean spreading my largesse further or wider. Numerous experts agree: It's most effective to give consistently to a few organizations than to spread your dough too thin—that way, you make more of a dent in the cause. Even worse, some charities sell the names of their small-potatoes donors to other charities. That's your thanks for tossing $10 a year to Save the Abused Monkeys: a flood of orangutan-related junk mail.
Since my charity bucks are limited and divvying them up isn't ideal, I'm aiming for a tight sweet spot: a small donation with real bang for the buck. When I read about microcredit—the practice of making tiny loans to poor people in the developing world so that they can start businesses and break out of poverty—it piqued my interest. And when the Grameen Bank of Bangladesh and its founder, Muhammad Yunus, won the 2006 Nobel Peace Prize for pioneering microcredit work, I was hooked. As an entrepreneur, I dig the idea of helping another jump-start her kitchen-supply business in Ghana. It also eliminates that pointless drop-in-a-bucket feeling to know this specific woman couldn't open her tamale stand without my $20—let alone the fact that when the loan is repaid, that $20 can get reinvested into another success story. (Truly the gift that keeps on giving.) Question is: Which microlenders cater to individual donors? And which is the most satisfying place to sink my dime?
Microcredit firms come in three flavors. First, there are thousands of grass-roots lenders, which administer loan programs locally in villages throughout the world. Second, there are what I'll call "aggregator foundations," which gather donor money and redistribute it to local programs they deem worthy. Those local programs make the actual loans to individual entrepreneurs, recycling the repaid funds into new projects later. The last type is your microcredit yenta: They match individual lenders with individual borrowers, Feed the Children-style. I focused only on players from the latter two categories, since they cater most to individual donors. I excluded faith-based lenders and the thousands of local lenders from my test as well.
I judged all players by three criteria:
User Experience (10 points).Was it convenient and easy to make my payment? Could I split up my payment or reinvest my lent funds automatically? (Keep in mind that making a loan is not tax-deductible, because it's eventually paid back. An irrevocable donation to a foundation, however, is usually tax-deductible.) How well could I navigate the Web site to find an intriguing, worthy business to fund? Upon completion, how badly did I want to tell the world what I'd done so they could try it, too?
Trust (10 points). Since microcredit is just going mainstream, these organizations were mostly new to me. I measured trust by years in business and third-party endorsements like four-star Charity Navigator ratings, plugs in major press outlets, or awards (one point for each, four points maximum). I also took note of efficiencies in fund-raising and administrative costs (how many cents of every donated dollar the charity devotes to the cause itself vs. operating expenses), as well as any mention of the percentage of borrowers who are able to pay back their loans.
Effectiveness (15 points). Measuring whether my money makes a difference is crucial but difficult. Do I get the project detail I need to evaluate the project/borrower? Do they offer results data later? Are there any stats for repeat loans for borrowers, indicating business growth? Can I connect directly with my borrower or a program manager?
The results, from worst to first:
Prosper is basically eBay for small loans. Say your Aunt Tabitha launches a business knitting leg warmers. Prosper offers her a chance to quickly borrow the capital she needs from other individuals, in a way designed to get her a competitively low interest rate on her loan. Here's how: Tabitha enters a loan request online at Prosper, including the amount she wants to borrow and the interest rate she wants to pay. Before her loan request goes public, Prosper checks her credit score so that prospective lenders can make sure she's legit. Lenders, in turn, register at Prosper, transfer money into their Prosper accounts, and then search the site for loans they'd like to fund. When the Flashdance fans find Tabitha's business, they can lend any amount they want, from $50 to the total loan amount. Just like a hot item on eBay, competing lenders can lend money at a lower interest rate than she asked for. As they compete, Tabitha's loan costs drop. At the same time, lenders benefit by earning interest on loans they make.
It's a good idea. And Prosper connects only Americans, so you naturally get better credit-worthiness data than you get for any Third World borrower. But Prosper's problem is garbage-in, garbage-out: too many people paying off credit-card bills and funding blowout weddings. (Wonder what type of business she's starting.)
Sifting through this garbage, and the fact that they don't accept credit cards or PayPal, made lending on Prosper less than pleasurable. While I did decide to provide inventory financing for a nice guy manufacturing infant mattresses, for all the hassle, I crave more of a change-the-world feeling.
User Experience: 6 (out of 10)
Trust: 5 (out of 10)
Effectiveness: 5 (out of 15)
Total: 16 (out of 35)
The current hot-potato debate in the microcredit world is whether microlenders should seek a profit to self-sustain or stay committed to their nonprofit roots. That issue isn't irrelevant to small donors, but it's most pressing to big-time philanthropists and global banks eager to promote their favored approach. (My short list will probably reveal my left-of-center bias: I like my charities fiscally responsible but also clearly charitable.)
If you prefer the for-profit approach to microlending, check out South America-focused Acción. Acción extended the world's first microloan in Brazil in 1973. In the mid-1990s, it shifted to a commercial model, in ideological opposition to its sister-competitor in the region, Pro Mujer, which remains not-for-profit.
You can donate any amount you want via credit card online, but you don't get any say as to where your donation goes. I dropped my $20, collected my friendly thank-you e-mail and tax-deduction receipt letter, and that was that. For those excited by finance-speak, the site offers ample stats and reports, but I was seeking some feedback on the human level.
Acción International does boast a consistent four-star Charity Navigator rating, and the organization's longevity makes it worthy of a good effectiveness score—they must be making a difference after all these years. But I found Acción's hypercorporate feel, plus the lack of say-so on my money's use, troubling. Is my $20 funding MonstroBank's foray into usury in Guatemala? I wanted reassurance to the contrary, or at least the chance to steer my contribution away from that.
User Experience: 6
A midsized aggregator since 1979, Trickle Up sells the concept of microcredit arguably better than its peers. It leads with specific entrepreneurs' stories, a remarkably simple but effective way to motivate lenders. It's illuminating to hear what kinds of businesses one can start for a few hundred bucks—raising pigs, making bricks—and what bumps entrepreneurs may suffer along the way. Trickle Up provides what it calls "risk-free conditional seed capital in the form of a grant," so technically speaking, it's a donation you don't get back, but it monitors the return on those funds as closely as if it were a loan.
Donating is straightforward, if basic. (Trickle Up also accepts donations as low as $5, even by credit card, which is a nice little-guy gesture.) While you don't have much say in where your money goes, I didn't feel as much need to micromanage: Its commitment to the businesses' effectiveness rings true, as does its practice of releasing grant money in increments while a business proves itself. Eighty-one percent of Trickle Up entrepreneurs depend on their new business as their primary source of income, and most report substantial gains in their family's nutrition, education, and sense of financial security. Effectiveness stats like that, plus the organization's respectable history and highly efficient budget—86 cents of every dollar goes toward making loans—add to Trickle Up's credibility.
User Experience: 8
Started by ex-World Bankers, this matcher categorizes its offerings so that you can find the cause that's right for you. Those interested in, say, "economic development" can contribute to projects ranging from safety training and English lessons for Nepalese sherpas, to carpet-weaving equipment and supplies in Afghanistan. Global Giving takes 10 percent of your payment for its operating expenses, but some of that 10 percent also returns to you in the way of meaty project information: a project overview, including e-mailable project contacts; detail on the local lender; regular progress reports; an estimate of what your payment amount will buy for the project. You can't beat that kind of accountability.
Global Giving scored high on all three criteria, although all those numbers-heavy reports misled me into thinking I was making a loan, not a donation. I funded a program that trains battered women in Brazil to make and sell traditional Brazilian dolls; only when I'd paid up (credit cards, PayPal, or check) did I realize this was a tax-deductible gift. Global Giving's very solid offering would work just as effectively to make person-to-person microloans; I'd love to see them focus on that more.
User Experience: 8
The Mack Daddy of microcredit, Grameen pioneered the solidarity-circle model used by many microlenders: A group of borrowers guarantee each other's loans—if one woman can't pay back her loan, the others have pledged to cover her—and meet regularly to brainstorm and participate in job training and self-esteem courses. The social pressure keeps default rates low and builds interconnected networks of entrepreneurs in each locality.
Trust-wise, Grameen has a four-star Charity Navigator rating three years running and universal press acclaim—and that Nobel Prize its founder won doesn't hurt, either. On the effectiveness front, however, I craved an opportunity to direct my donation and wanted more feedback once I had parted with my money. Then again, maybe I should just trust the World Bank: It claims microcredit, thanks to Grameen, accounts for a full 40 percent of the reduction in moderate poverty in rural Bangladesh. While I thrill more to the idea of lending to an individual than giving to a big foundation, if you're going with a big gun, Grameen is microcredit's clear leader.
User Experience: 6
Finally: microlending as I'd imagined it. Kiva (agreement or unity in Swahili) lets lenders choose from individual borrowers, who are vetted internationally by local microlenders. Started as a side project in 2004 by a married couple, neither the lender nor Kiva takes a cut of the interest, saving it all for the local lender to administer to the borrowers day-to-day.
The organization gets strong marks for both usability and payment options (all credit cards, plus PayPal); you can fund loans partially, although the minimum payment is $25. I funded Madam Elizabeth Lomotey in her kitchen-supply business in Ghana and was surprised to see pictures of my fellow lenders next to mine.
Kiva's weakness is the cursory business-plan descriptions: You're really trusting the judgment of the local lender more than the plan itself. I can overlook this, though, given the high number of descriptions local lenders seem to have to write on behalf of the borrowers. Other perks? You're alerted via e-mail every time another loan payment comes in, and it's fun to check back on your lender and review his or her journal entries. (Sadly, Madam Lomotey is a taciturn one; other borrowers and their local loan managers get more chatty.) All that's missing is information on the borrowers' previous loans, which could indicate an expanding business.
Kiva combines online community with microlending in a way that's truly exciting. It's remarkably compelling to see your borrower face to face—you can even contact them via their local lender rep. Given Kiva's shoestring budget, it's a strong start.
User Experience: 10