Kiva.org and Microfinance

Recently a friend asked me what I thought about CD's. My initial response was they are good if you need short term savings (~ less than 4 years) and know the amount of time before you need it in advance. I also said, recent "online" savings account can net you pretty similar returns as well and allow you much greater liquidity. After a little bit I thought about another option which I favor -- Microlending through institutions like Kiva.

You're probably asking "What is Microlending?" Well overall it is lending very small amounts (you seem to lend in increments of $25) of money to entrepreneur in third world countries. Now the objective of this is not to gain a high rate of return, because the best you can get is 0%. Looking at http://www.kiva.org/about/risk/statistics/, you can see that the default rate is 0% for 4-5 star rated partners. Which simply means after lending out millions to those 4-5 star partners.. no lender has loss a dime. The best part of this method of charity is that it barely costs lenders money (loss of interest you could've gained), and you teach the recipients "how to fish" rather than just "giving the fish". Right now interest rates are pretty much bottomed out.. they will probably rise after our economy recovers but for now, your loss of interest is pretty cheap.

Most of the recipients are also women (apparently they are more trustworthy than men in most of these countries). While traditionally in most of these countries women are given inferior "roles", this helps a lot in empowering them -- which I view as a very positive thing. Now you may be a free-market type person like me and ask yourself, "Wait.. if they have an idea so great why can't they get financing on their own?" This is an instance in which I believe the free-market fails. My reasoning is the fact that people of wealth can hold out much longer than their potential debtors. Thus they can just wait until the debtors become so desperate for financing that they are willing to accept absurd interest rates. This is basically usury. In the book, "Banker to the Poor", the author points out an example of this, where this basket weaver basically has to give back interest so absurd that she had no profits after interest.. she simply made enough to continue basket weaving, barely feed herself, and pay back the interest. I'm talking annualized rates of 300%+. So she was surviving ... basically to reward her creditors rather than herself, and the cycle continues and she makes no progress. With microlending you can help people like her break free from this vicious cycle.

So if your choice comes down to low interest rates of 1-2% in CD's/Savings/Money Market accounts, or barely risking your money(0% default rate! for 4-5 star rated field partners) and at the same time alleviating poverty in third world countries, empowering women to be equal in those societies, and have that all be sustainable and have a potentially big chain effect ... I think the choice is clear. So check out the site, figure out the details and see if it's something you want to be a part of.

Now I'm a big believer in "eating your own dog food", "put your money where your mouth is", etc. So I'm going to allocate 1000$ and look for opportunities to microlend sometime in the near future. I hope you'll join me.

And for those who care I bought 3 shares of Google for 455$ each on Monday.