The microfinance industry, which came to prominence through its pioneer Muhammad Yunus (pictured) of Grameen Bank, is being rocked by scandals and poor economic performance. Image from Wikimedia Commons.

The microfinance industry and the microloan came out of the last several decades as a novel way to empower low-income people by extending them credit. Microlenders have been showered with praise and even Nobel prizes. However, some modern microfinance firms don’t appear to be following in the ethical or economic footsteps of the ones that came before.

Microlending firms founder

Microlending firms in Asia have experienced turbulence recently, leading some to question what the future of microcredit holds in that region. SKS Microfinance, according to the New York Times, has lost about 70 percent of its stock value on the market since its initial public offering in August of 2010. In the last quarter of 2010, the company posted a loss of more than $15 million after posting a profit of more than $14 million in the first quarter. The Indian government has been legislatively cracking down on SKS and other microcredit firms after numerous accusations of strong arm loan collections have become rampant. Last year the Economic Times reported that about 30 people in the state of Andhra Pradesh committed suicide in a 45-day period, allegedly because of debt to microcredit lenders.

Governments square off

The governments of Bangladesh and India have both pushed back against microlenders that they say crossed the line. The central bank of India passed legislation capping interest rates on microloans to 26 percent and loan amounts to 50,000 rupees or about $1,120. Furthermore, state politicians in Andhra Pradesh encouraged people to stop paying their debts to microloan lenders, and loan repayments there fell to about 10 percent, according to Forbes. In Bangladesh, Muhammad Yunus was forced from his position as head of Grameen Bank, the institution he founded, which has lent out billions in microloans to impoverished people around the world. Yunus won the Nobel Prize in Economics for his work. Lenders are accused of forcing people into a vicious cycle of debt and some are accused of using illegal or immoral methods to get borrowers to pay their debts. Yunus has been openly critical of for-profit lenders; he contends that the motive to make money rather than to help people get out of poverty is crippling microcredit as an economic tool.

The end may not be in sight

Microcredit lenders may be struggling because of economic and political conditions, but the model is beginning to take off in other countries. The Kiva organization uses donations from private individuals to raise capital for microloans all over the world. There are also American versions of microfinancing opening up. For instance, the Samuel Adams brewing company launched a joint venture with the non-profit foundation ACCION USA. Entrepreneurs can get small l0ans of a few thousand dollars to start the food-related business of their dreams, according to USA Today,. The Small Business Administration has loan programs for startups.

Sources

New York Times

Forbes

USA Today

Economic Times

Kiva Green Loans are intended to help individuals in low-income countries make eco-friendly changes, such as installing solar panels. Image: Flickr / theregeneration / CC BY-SA

In 2008, a small person-to-person lending company called Kiva launched. The person-to-person lending company has now added green loans and student loans to the financing portfolio. With these new products, Kiva hopes to hit $1 billion in microloans lent by 2015.

The basics of Kiva

Kiva was the first major online microloan site. The nonprofit organization matches investors with entrepreneurs and individuals who need small loans. Usually loans through Kiva are for amounts between $100 and $500, and the repayment rate is incredibly high, between 90 and 98 percent. Currently, Kiva members loan about $1 million every five days. Kiva is the only not-for-profit microlender, though there are other lenders who offer bad credit loans and microloans for a profit. There are borrowers in 59 countries that have used Kiva loans, mostly in low-income countries. Kiva also allows some loans in the U.S. , but not every type of loan.

Kiva adds green loans to lending options

In addition to the small-business loans and personal loans , Kiva now offers green loans. These loans are intended to be used for projects such as solar power, drip irrigation, converting farms to organic production and the creation of biofuels. The criteria for these loans remains the same as every other Kiva loan, and the investment amount also remains the same – $25 increments. Green loans can be personal or business-based and have the same repayment terms as every other loan offered on the site.

Student lending through Kiva

In three countries, Kiva is now also offering student microloans. Students in Bolivia, Paraguay and Ecuador are now able to get student loans through Kiva lenders. Students are given one to three years to pay back their loans, and lenders can track the progress of the student all the way to repayment. The program is stil considered to be in pilot status, but appears to be doing well.

The growth of microfinance

Prosper, Lending Club and several other microlending services launched at the same time as Kiva, in 2008. The Securities and Exchange Commission shut down these for-profit companies for not registering properly. These companies are mostly back up and running, properly registered. Microlending companies are starting to cut into the business of big banks and credit cards. These microloans are still relatively new, but as long as there is a market for small-dollar credit extended to individuals that may have bad credit, financial innovation in that industry will continue.

Sources

Kiva Green
Slate.com

The private microfinancing site 40Billion.com offers commercial paper, traditionally a tool for large corporations, to small businesses. Image: CC The Truth About/Flickr

The online private microlending and social networking company 40Billion.com announced new short-term loan options for small businesses Monday. Using unsecured promissory notes, commonly called commercial paper, small and medium-sized businesses can finance opportunities through 40Billion.com for up to nine months. A week earlier, the microlender launched integrated social networking tools, enabling its members to use LinkedIn and Facebook accounts to help raise money.

A new short-term loan option

Commercial paper has been used for more than a century, mostly by large corporations wanting to raise quick, cheap working capital. Now 40Billion.com is offering the commercial paper option to small and medium-sized businesses that wish to borrow from $5,000 to $1 million for up to 270 days. Commercial paper is an unsecured promissory note to meet short-term financing and cash flow needs. In certain situations, commercial paper can be an affordable alternative to a traditional bank line of credit.

Why commercial paper?

According to 40Billion.com, commercial paper offers several advantages over traditional bank loans. Commercial paper is unsecured, meaning it doesn’t create a lien on the borrower’s assets. The discount rate is negotiated through 40Billion.com with investors seeking to diversify and earn a quick return. Businesses with strong Social Business Rating System (SBRS) scores and good relationships can get affordable rates. SBRS is 40Billion.com’s proprietary rating system that evaluates businesses on criteria other than traditional credit scores. The broad range of maturity, from 15 days to 270 days, provides flexibility for a variety of short-term cash needs such as payroll, inventory and marketing.

Social network financing

Founded in 2008, Atlanta, Ga.,-based 40Billion.com claims to have facilitated more than $30 million in loans between investors and entrepreneurs.The company said it helps its members find new customers and financing resources via social networking. 40Billion.com users can log in with LinkedIn or Facebook. The financing site automatically displays the users profile from either of those social networks. Users can also import contacts from e-mail programs. The integrated social networking tools in 40Billion.com also suggest new contacts that members may know through past associations or similar interests.

Sources

Information Week

News Wire Today

40Billion.com

The USDA and Nevada Rural Development Corp. are partnering to offer small loans to "underbanked" businesses. Image: Flickr / MoneyBlogNewz / CC-BY

The Rural Nevada Development Corp. is kicking off a new “microlending” program. The U.S. Department of Agriculture-funded program targets businesses that couldn’t otherwise qualify for loans. One-fifth of the money has already been handed out.

Reno, Nevada, rural development loans

A $500,000 grant from the U.S. Department of Agriculture is funding a new “microlending” program. The program funds bad credit loans for Reno and Reno-area businesses through the USDA Rural Microentrepreneur Assistance program. These loans provide up to $50,000 for businesses that have been denied traditional banking loans. The fixed-rate loans charge between 10 and 12 percent interest and must be paid back in five years.

Qualifying for Reno bad credit business loans

In order to qualify for the Rural Nevada Development Corp. loans, a business has to meet several criteria. A business has to have less than $1 million in gross revenue per year and fewer than 10 employees. The business also must have applied for traditional loan financing and been denied. The money is available for businesses around Reno, Carson City, Las Vegas and Indian Reservation areas. There is $500,000 allocated for these loans in Nevada, and $100,000 was handed out within the first five days of the program. Loan administrators expect that all $500,000 will be given out within the month.

More on microfinance

“Microfinance” and “microlending” are becoming popular terms. Though the USDA is calling this Reno loan program “microlending,” it lends much larger amounts than most microfinance programs. Microfinancing is usually targeted towards very low income individuals, often in developing nations. Microlending usually comes in amounts around $1,000 — making the RNDC “microlending” program comparatively gigantic. Most microlending from developed countries to developing countries is through private individuals, but there is a “hole” in the credit market for businesses without good credit history and without money to develop their own businesses.

Source

RGJ.com

Microlending is on the rise as banks refuse to allow small business credit and small business lending bills go nowhere in Congress. Mt. T in D.C./Flickr photo.

Microloans are emerging as an answer to the small business credit crisis. Microloans are more commonly associated with  developing countries. But microlending is on the rise in the U.S. as more small businesses are taking out microloans when the bank says no. Microlending could increase even more as a small business lending bill that would cut taxes and ease credit for small businesses stalled amid partisan feuding in the Senate.

Microlending: welcome to the third world, America

Microlending — making small loans, usually to the poor — has been one of the most effective means of financing growth in third world countries. But then the U.S. economy fell and can’t seem to get up. The New York Times reports that tight credit and the recession have increased the demand for smaller loans in the United States. Microlending is getting noticed and microloans are increasing in popularity. Kiva, which has lent more than $150 million in 53 countries, has started pilot program lending to business owners in the U.S. Grameen Bank — a microfinance group based in Bangladesh that was started by Muhammad Yunus, who won the Nobel Peace Prize for his groundbreaking work in microlending — has also widened its lending to Americans.

Small business lending bill fails

As microlenders take action to help small businesses, the U.S. Senate is sitting on its hands. Bloomberg reports that a bill addressing the lack of small business credit died July 29 when senate Democrats failed to get enough votes to consider the legislation. The bill would have provided $30 billion to banks with less than $10 billion in assets to encourage small businesses lenders. The cost of paying back those billions would decline for small business lenders as their level of lending rose. It was estimated that the small business lender package could prime $300 billion in lending. But Republicans wanted to tack extending the Bush tax cuts to the bill and said it would encourage more risky lending.

Microlending success stories

While the Senate dithers, microlending is scoring success stories. The New York Times article tells the story of a restaurant owner in Silicon Valley who saved her business with a $6,500 loan that she has three years to pay back and that carries a 6 percent interest rate. The Miami Herald reports that OUR MicroLending, a Miami-based lender, has made 764 microloans totaling $4.5 million. Its customers typically have fewer than five employees, with sales of $100,000 or less. OUR microloans range from $1,500 to $12,000 and average about $5,000. The average term is a year.