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Microgiving: Close Cousin, Microlending

A few dollars you invest can help small-time entrepreneurs in a big way

You may have something would-be entrepreneurs the world over desperately need: a little capital. Even as little as $25. You’ve probably never thought that such a meager sum could help expand a livestock breeding operation in Azerbaijan, put a systems engineer through school in Nicaragua or launch a hair salon in San Francisco.

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But thanks to the new world of online microlending, that’s what your $25 or $100 can do. Not alone, of course. Bundled with other investments at a handful of microlending websites, your money becomes a microloan — typically between several hundred dollars and several thousand dollars — for a borrower whom traditional lenders would pass over.

History

Microlending isn’t new. Some economists trace its origins to 1720, when Jonathan Swift, Irish author, satirist and pastor, started the Irish Loan Fund to provide collateral-free loans to the poor of Dublin. In the United States, the Hebrew Free Loan Society, founded in 1892 to help indigent Jewish immigrants, has provided interest-free loans, on a nonsectarian basis, to more than 865,000 borrowers. And then there’s Bank of America, founded in 1904 by Amadeo Giannini of San Francisco under the name Bank of Italy to cater to immigrants who were denied service by other banks.

The expansion of microlending in developing nations to help the world’s poorest people generate income and escape poverty was first championed in the 1980s by Muhammad Yunus, a Bangladeshi banker, economist and author of a new book, Building Social Business: The New Kind of Capitalism That Serves Humanity's Most Pressing Needs. Yunus, who founded the Grameen Bank in Bangladesh to put his ideas into practice, received the Nobel Peace Prize in 2006 for his efforts.

For some time, microlending was almost entirely the domain of development banks and such huge international organizations as the World Bank and International Monetary Fund. But in 2004, the nonprofit organization Kiva pioneered the idea of using the Internet to join together individual investors and connect them with credit-seeking entrepreneurs around the world.

Next: 3 online microlending opportunities. >>

3 Microlending Opportunities

So if you’d like to do good deeds over and over again with the same pool of capital, microlending may be for you. Like their bigger brethren, microloans aren’t risk-free. In theory, you could lose all your money. But at least they offer you the prospect of recouping your investment and in at least one case an actual return on your investment.

Here are three organizations that can help you become a small-time banker with a socially responsible portfolio.

Kiva. Matt Flattery began developing this web-based microlender while working as a computer programmer at TiVo Inc. He left the company to devote himself full time to his new enterprise — named with a Swahili word meaning “unity” or “agreement.” Kiva has provided more than $143 million in interest-free microloans to entrepreneurs in more than 50 countries, and it has enlisted more than 462,000 individuals as $25-and-up microfinanciers. For each loan applicant, Kiva presents an online photo and a short narrative about the person, including location and the intended purpose of the money. The site also lays out the proposed repayment terms and schedule, possible risks, and the track record of a Kiva field partner — an established microfinance institution such as the Sinapi Aba Trust in Ghana or Zene za Zene (Women for Women) in Bosnia and Herzegovina — which administers the loans. Kiva’s overall repayment rate to date is 98.3 percent.

Vittana. Co-founded by Kushal Chakrabarti and Brett Witt, formerly of Amazon.com, Vittana resembles Kiva but lends to only low-income students in the developing world. Vittana (the word means “seed” in a regional language of India) partners with local microfinance institutions — banks or nongovernmental organizations that make student loans — in Mongolia, Vietnam, Nicaragua, Peru and other countries to build student loan programs from the ground up. Vittana’s focus is on short vocational programs and the last year of college to minimize risk and maximize the likelihood of repayment. You can lend as little as $25. Vittana officials say that each of its partner organizations has a demonstrated track record of high repayment rates, often above the industry average of 97 percent.

MicroPlace. Tracey Pettengill Turner, who once worked for Yunus' Grameen Bank, was trying to get MicroPlace up and running in 2006 when executives of eBay, the online auction and shopping website, acquired it. They saw Turner’s idea — a website that would allow ordinary people to receive modest returns by investing in the world’s working poor — as a perfect fit with PayPal, eBay's online payment-processing company that now handles MicroPlace's loans at no charge. You can get started with as little as $20, and earn from 0.5 percent to 6 percent on your investment. Because you’re actually investing in “shared investment notes,” a type of security issued by the microfinance institutions that partner with MicroPlace, the entrepreneurs depicted on the site are described as “sample borrowers.”

Bill Hogan lives in Falls Church, Va.

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