Joho the Blog
An Entry from the Archives

I definitely see the appeal of p2p philanthropy. It calls up images of a bittorrent-like flood of dollars washing up at the feet of under-resourced communities around the globe.

But your reservations are well founded. Microfinance is especially appealing, with images and stories of specific individuals whom our loans might assist. But the micro-credit industry isn't all it's cracked up to be.

Microcredit programs do nothing to change the structural conditions that create poverty. But microcredit has been a success for the many banks that have adopted it. Of course, lending to the poor has long been a lucrative enterprise. Pawnshops, finance companies, payday loan operations, and loan sharks charge high interest rates precisely because poor people are often desperate for cash and lack access to formal credit networks. According to Sheryl Nance-Nash, a correspondent for Women's eNews, "the interest rates on microfinance vary between 25% to 50%." She notes that these rates "are much lower than informal money lenders, where rates may exceed 10% per month." It is important for the poor to have access to credit on relatively reasonable terms. Still, microcredit lenders are reaping the rewards of extraordinarily high repayment rates on loans that are still at somewhat above-market interest rates.

Anecdotal accounts can easily overstate the concrete gains to borrowers from microcredit. For example, widely cited research by the Canadian International Development Agency (CIDA) reports that "Women in particular face significant barriers to achieving sustained increases in income and improving their status, and require complementary support in other areas, such as training, marketing, literacy, social mobilization, and other financial services (e.g., consumption loans, savings)." The report goes on to conclude that most borrowers realize only very small gains, and that the poorest borrowers benefit the least. CIDA also found little relationship between loan repayment and business success.

However large or small their income gains, poor women are widely believed to find empowerment in access to microcredit loans. According to the World Bank, for instance, microcredit empowers women by giving them more control over household assets and resources, more autonomy and decision-making power, and greater access to participation in public life. This defense of microcredit stands or falls with individual success stories featuring women using their loans to start some sort of small-scale enterprise, perhaps renting a stall in the local market or buying a sewing machine to assemble piece goods. There is no doubt that when they succeed, women and their families are better off than they were before they became micro-debtors.

But the evidence on microcredit and women's empowerment is ambiguous. Access to credit is not the sole determinant of women's power and autonomy. Credit may, for example, increase women's dual burden of market and household labor. It may also increase conflict within the household if men, rather than women, control how loan moneys are used. Moreover, the group pressure over repayment in Grameen's loan circles can just as easily create conflict among women as build solidarity.

Also: loved your talk at NTEN. Thanks.

It's a bit farther from philanthropy than kiva (Which I hadn't heard about before), but prosper.com is vaguely similar.

Ben's comment implies that people who say lend money on prosper are in the same category as the companies providing "pay day loans". I'd encourage him to go on prosper and read some of the loan requests from people who are trying to get out from pay day loans (and similar).

Sure, they still pay a high interest (or what seems high to people with a good credit rating), but they often end up going from an unending cycle of more and more high interest loans to being able to repay their debts within a reasonable period.

- ask

Bjørn,

I wasn't implying anything about prosper; it wasn't under discussion at the time that I posted my comment. I was responding to David's stated concern that:

Our sympathies aren't always the best guide: We may do more good by building a prosaic community water filtering system than by giving a loan to the family with doe-eyed child...or by buying read-along tapes for an American 4th grade class. We have trouble responding sympathetically at the level of systems.

And I was talking about micro-finance because kiva.org solicits donations for micro-financing in developing nations. Though the system at prosper.com is structurally similar to microfinancing in developing nations, the similarity is superficial. For one thing, the interest rates for the loans in microfinancing are typically 5 to 10 times higher than the rates posed as typical in the info on prosper.com.

I can't really judge the goodness or badness of prosper.com without spending a lot more time reading the fine print. I would say, however, that prosper and kiva are apples and oranges.

By the way, I'm not even insisting that kiva.org is a bad thing. I'm just saying that a) it needs to be scrutinized and b) that the critique of microfinancing that I quoted from is precisely that it does little "at the level of systems."

psp.com

re: anonymity--

Should Bob Dylan have been made to have called himself by his "real" name--Zimmerman. A nome de plume is a part of the art, as long as no real injustice results, but who am I to say?

You're absolutely right. I've been similarly excited and cautious when it comes to groups like Kiva, DonorsChoose and another one I've been watching, modestneeds.org (which I've written about on my personal blog). As with any model, I think we'll find that some P2P philanthropy turns out to be ill-conceived while other P2P-focused organizations are very deserving. I wouldn't say that P2P philanthropy is inherently less well suited to getting at systemic issues. In your example, a water filtration system for a particular village could be among the solutions that some organization (like Oxfam) decides to use P2P philanthropy to achieve, giving some donors the opportunity to choose that specific project as the recipient of their contributions. But the ultimate effectiveness of such donations depends heavily, perhaps more heavily than ever before, on having good organizations like Kiva creating a sensible process for directing donors to fundable projects that have been vetted and stand a good chance of success. And of course there will continue to be a kind of donor marketplace in which Kiva and DonorsChoose and Modest Needs and Oxfam (and scholars and policy makers and individual citizens) all make their case to the world about why they feel certain approaches to social change are likely (or not likely) to result in major positive outcomes; it's often at that vision level where donors have to decide which social change theories they find most compelling. Some will want to put all their money behind microlending and possibly use kiva as the vehicle; others, like you and I, might prefer to hedge our bets; and Ben, who seems highly skeptical of microcredit in general, will steer clear whether it's a P2P org like Kiva or any other microcredit org asking for his support.