Here is a paper I wrote for my Accounting class on microcredit as an emerging form of charity.
Microcredit is the loaning out of money to small businesses who normally wouldn’t qualify for traditional bank loans. These loans are given to business owners in third-world countries to help spur entrepreneurship. These individuals wouldn’t qualify for any alternative forms of credit due to their lack of collateral or steady employment, and therefore would have more difficulty starting their own businesses. Microcredit is designed to help move people out of poverty by funding their own enterprise.
KIVA is a relatively new invention for spreading the idea of microcredit. It is an NPO based in San Francisco that makes microcredit loans to third-world entrepreneurs by going through local banks. These banks post profiles of entrepreneurs looking for loans, and lets KIVA users choose who to donate to online. The transactions are made through PayPal, who doesn’t collect interest or fees off of KIVA transactions. KIVA users can choose to withdraw funds or continue to lend after the full amount of their loan is paid back. Internet access, in some cases, allows the entrepreneurs to connect directly with the lenders, providing personal communication with the person and the business you are benefitting. To date, KIVA has distributed over $63 million in loans and currently has a 97.79% repayment rate. Because of its small size and low costs, KIVA is able to charge much lower interest rates than traditional financial institutions, sometimes as low as 2.5%.
The innovative idea behind microfinance as opposed to traditional charitable contributions is that these “gifts” are actually loans, which will be paid back. So, essentially, nothing is lost except negligible interest, whereas donations are not repaid. An excellent business model is that of African shaved ice. The company operates on the premise that they give all profits to KIVA to make loans with, and after the loans are repaid, they take the profits back into the business. The business is a mobile shaved ice shack with profiles of KIVA entrepreneurs posted on the side of the shack. Each purchase of shaved ice gives you a token that you can put towards a loan for whichever entrepreneur you choose. Each token represents an amount that will be donated to that entrepreneur. I was amazed when I first heard of this idea, because you could help other people without depleting your own resources.
Microcredit is the loaning out of money to small businesses who normally wouldn’t qualify for traditional bank loans. These loans are given to business owners in third-world countries to help spur entrepreneurship. These individuals wouldn’t qualify for any alternative forms of credit due to their lack of collateral or steady employment, and therefore would have more difficulty starting their own businesses. Microcredit is designed to help move people out of poverty by funding their own enterprise.
KIVA is a relatively new invention for spreading the idea of microcredit. It is an NPO based in San Francisco that makes microcredit loans to third-world entrepreneurs by going through local banks. These banks post profiles of entrepreneurs looking for loans, and lets KIVA users choose who to donate to online. The transactions are made through PayPal, who doesn’t collect interest or fees off of KIVA transactions. KIVA users can choose to withdraw funds or continue to lend after the full amount of their loan is paid back. Internet access, in some cases, allows the entrepreneurs to connect directly with the lenders, providing personal communication with the person and the business you are benefitting. To date, KIVA has distributed over $63 million in loans and currently has a 97.79% repayment rate. Because of its small size and low costs, KIVA is able to charge much lower interest rates than traditional financial institutions, sometimes as low as 2.5%.
The innovative idea behind microfinance as opposed to traditional charitable contributions is that these “gifts” are actually loans, which will be paid back. So, essentially, nothing is lost except negligible interest, whereas donations are not repaid. An excellent business model is that of African shaved ice. The company operates on the premise that they give all profits to KIVA to make loans with, and after the loans are repaid, they take the profits back into the business. The business is a mobile shaved ice shack with profiles of KIVA entrepreneurs posted on the side of the shack. Each purchase of shaved ice gives you a token that you can put towards a loan for whichever entrepreneur you choose. Each token represents an amount that will be donated to that entrepreneur. I was amazed when I first heard of this idea, because you could help other people without depleting your own resources.
Links: KIVA
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