You can fight extreme poverty, $25 at a time

Helping to fight poverty may be less difficult than you think. You could make a loan over the Internet to help someone in a developing country expand a small business; you could become a “banker to the poor.”

Abdul Satar, a 64-year-old baker in Kabul, Afghanistan, borrowed $425 from seven Americans. He used the funds to open a second bakery with four employees; the loans also allowed him to buy his inputs – flour and firewood for his ovens – in larger quantities and therefore more cheaply. He told one of his “bankers,” an American visitor to Kabul who had loaned him $25, “If you come back in 10 years, maybe I will have six more bakeries.”

The American was Nicholas Kristof, a writer for the New York Times, and he made his $25 loan through KIVA, a “microlender” with headquarters in San Francisco. He used KIVA’s Web site, www.kiva.org.

Mariam Iyere, a Nigerian, spent years learning the business of selling building materials and now sells them herself from her own store. She needed a loan of $875 to increase her inventory, and through KIVA my wife and I loaned her part of that sum.

KIVA made it easy to select Mariam: Its Internet site gives information about many possible borrowers, including photos and descriptions of their businesses. You can lend as little as $25, a sum that, even in today’s hard times, many of us can afford. Repayment also is easy: Borrowers repay an organization in their own country – KIVA has many partners in Asia, Africa and Latin America – and then KIVA forwards the funds to you. KIVA’s borrowers have a remarkable 97 percent repayment rate, and they repay most loans in 10 months.

After your loan is repaid, you will have several options: You can choose to make an additional loan to the same borrower or to another borrower, or you can just keep the money.

You may not want to manage the lending process yourself. Instead, you could simply give money to a different microlender which, like KIVA, has partner organizations abroad. One of these partners will make a loan locally, and the borrower will repay it locally. Two organizations that work like this are ACCION International, www.accion.org, and FINCA, www.villagebanking.org.

The international microlending movement is huge and growing rapidly. Worldwide, an estimated 1,000 to 3,000 microlending organizations are serving roughly 100 million clients, mostly people in extreme poverty. About 70 percent of the borrowers are women. Remarkably, KIVA’s high repayment rate is not unusual; rates of 92 to 99 percent are common.

Why are repayment rates so high? This is puzzling, because most borrowers have few possessions and do not put up collateral.

To encourage repayment, some microlenders use “solidarity-group lending”: borrowers in a village or town are required to form a group, which meets weekly; the borrowers must make small partial repayments in front of other group members. If one borrower fails to pay, the whole group is penalized, and this puts pressure on everyone to pay.

Other microlenders use different incentives: Borrowers who repay their loans promptly are allowed to borrow larger amounts, while borrowers who default cannot borrow again.

Of course, microlending is no magic bullet, capable of ending poverty quickly. Often borrowers do not actually use their loans to expand a micro-business, but for purposes such as a medical emergency, a child’s school fees, or simply to tide their business over during a slack period. Further, microlending’s impact on poverty is limited: It cannot provide good roads, modern telecommunications or political stability – prerequisites for rapid overall economic growth.

Still, microlending has concrete benefits. It has helped many people expand their businesses and others to diversify their sources of income – so that farmers, for example, do not have to rely solely on their crops but can also earn income from a business. And in the long run, buying medicine or educating a child can reduce poverty as powerfully as expanding a micro-business.

Lending to the poor is not just a way to assuage our guilt. It can make a difference to people living in poverty worse than most of us have ever seen.

Since 1990, the number of people living in extreme poverty has dropped by about 250 million, according to United Nations data, despite overall population growth. Microlending probably contributed concretely to this progress.

Yet poverty’s challenge is still great: One billion people still live in extreme poverty. If you are thinking of joining the microlending movement, remember that KIVA offers an opportunity to test the water. When your KIVA loan is repaid – as it probably will be – you can decide whether to continue to be a “banker to the poor” or use the money in another way.

Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues.