The way that i figure this is better than charity is that by receiving back the $1000 you gave to someone, you are able to lend them to someone else and so you are able to help many others with the same money. however, i do agree with others in that it is inmoral that everyone is making money in this equation except the guy who is getting the money in the first place. A low interest rate should be paid to that person at least to compensate for inflation.
I perhaps mis-titled this thread, playing on the attention given this year to Micro Banking elsewhere I wrote âBecome a Micro Banker: Spread your wealth ~ http://www.kiva.org â and the phrase âSpread your wealthâ may have been a better title for this thread. Recently Mothers Against Drunk Driving â MADD came under fire last week, after a Toronto newspaper reported only 19 cents of every dollar raised goes to victim services and the fight against drunk driving.â http://www.peacearchnews.com/portals-code/list.cgi?paper=44&cat=23&id=796528&more= In some cities the Salvation Armyâs annual âChristmas Kettle Appealâ needs to pay people to be Kettle attendants otherwise Kettles wouldnât go on the street, and/or the Salvation Army wants to âmaintain visibilityâ regardless of funds raised. Many non-profit/charities hire professional telemarketers since they canât get results with volunteers and results are usually better for doing so. A $25 donation to the local Food Bank buys 3 times that amount of food via the Food Bank. Between providing a loan and the recipient of the loan receiving the money and repaying it to the lender, costs are involved, even for a non-profit organisation. Perhaps lenders could add 10 % (?) of the loan amount as a donation covering the costs as long as the lender is guaranteed not to incur any fees in the receipt/repayment process. The main point about âmicro bankingâ is the seemingly minuscule amounts of money people are trying to obtain that will create/expand a business that produces enough income to support an entire family.
Presumably Bangaldesh has plenty of scammers too, but that bank still manages a 98% repayment rate. If they've been in business 23 years, I suspect they may have worked out some techniques as to how to avoid widespread frauds and default.
How is it robbery? Remember the default-adjusted return most at least equal the money market borrowing rate, otherwise any financier is actually losing money. And that's with no compensation for the risk involved, or the costs of running the enterprise. Let's say you are a skilled lender and get a 95% repayment rate (pretty high if you are talking about unsecured loans to people in dire financial straits). Let's look at the maths: Lend out $10,000 total to different people. 5% default means you lose $500. Operating costs, who knows but lets say you are frugal and run it on $200 per year, so 2%. So at the end of the year, if 95% of people repay, you have now $9,300. If you had put your money into a money market account, you would have say $10,500. So, simply to make the same as in a virtually risk-free money market account, you would have to make $1200 profit on your loan, a return of 13% per annum. Now if say you need a risk premium of 3%, similar to the stockmarket, then that means you need a return of 16%. Bear in mind this is with an expense ratio of 2%, and a 95% repayment rate, and assuming no taxes. What if you only get 80% of your loans back, or operating expenses are 10%? Then, even if you charged 30% per annum interest, you would still be losing money on the deal. How can it be "robbery" if you are losing money by lending to people?
I think the point is that in a money-losing enterprise you cannot scale up over time to anywhere near the same extent, because you are continually relying on handouts each year. Growth in a charitable enterprise relies entirely on growth in donations. If we assume that donations rise in line with people's real incomes, then charity enterprises will on average grow at the same rate as gdp. Now, if you could make return on equity greater than t-bills by lending to the poor, then you can reinvest profits at a superior rate to gdp growth. Thus in 10-20 years you could have a multi-billion enterprise that made a huge difference to lots of peoples lives. If you are relying on mom & pops giving out of the goodness of their heart, then you will find it much more difficult. If the borrowers can make reasonable returns on capital (which seems entirely likely since their main problem is capital shortage, rather than inability or lack of desire to work), then it is entirely possible to have a win-win situation where the borrowers and the microbank both make money on a sustainable basis. If we look at the gigantic growth in living standards over the last 200 years in the west, was this achieved by getting handouts from richer countries? Or was it achieved by entrepreneurs, investors, and workers combining in enterprises to produce needed goods & services whilst at the same time earning returns higher than the risk-free rate? Surely if one wants to achieve a similar rise in living standards in the poorest countries in the world, one should look at what worked in the past and try to replicate it?