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When I think of donations many things come to mind. Donation jars at grocery stores to help pay for various treatments, writing checks to support organizations, and even giving money to a homeless person on the street. These methods all have their strengths and weaknesses but share some common flaws. What if someone really wants to have an impact but doesn’t know if they can afford to give much money or can not volunteer? One solution is loaning money, however how much trust and reliability is there in getting money back? It might be easy to get money back from a local family or a friend, but what if you want to help someone struggling states, countries or continents away?

Microfinance has risen as a new way to help people but, at the same time, allow people to secure their own finances. It involves people or organizations giving individuals loans that allow them to pursue goals that will hopefully allow them to become financially stable or successful, in order to pay back the loan and become financially independent. What is unique about microfinancing is that typically many people make small contributions to someone looking for a small loan, so although borrowers may be only looking for around $1,000, 10 or more people may be providing those funds to them. Although there are many organizations, I have chosen to focus on two popular organizations with different focuses.

Kiva.org’s tag line is “Loans that changes lives” and they truly wish to make microfinance a viable way to help those in need. They act as a middle man, connecting people who wish help others via loans to partner microfinance institutions around the world. These institutions have various small businesses/entrepreneurs in line, all with specific needs, goals and plans to achieve those goals, of which lenders look over and select to loan to. This system allows lenders to know exactly who is getting their money and how they are using it. Kiva does not give lenders a return on their investment, but requires the small businesses taking on loans to keep updates on their progress and the microfinance institutions report payments received to Kiva. When the loan is fully repaid, all the lenders get credit back from Kiva, of which they can use to put out another loan or get back their funds.

Kiva acts much like government aid for business, allowing them to pick up their businesses in tough times or just give them the capital they need as the last push to sustainability. People often ask for loans to buy new equipment to speed up their production or to buy new goods or just expand inventory of current goods. The phrase “You need money to make money” rings at the heart of the idea.

Prosper, on the other hand, focuses on the US and because of that the loans are usually of greater amounts, from a $1,000 up to $25,000. The site works on more of a social aspect, with borrowers posting extensive stories and their history on their loan requests and also have a “groups” function in order to give additional credibility to people. In their example, a group of volunteer firefighters created a group in Prosper and in that group they all share a badge with their total ontime and late payments. A fellow firefighter just joined Prosper looking for a loan but has no reputation, therefore his firefighter buddies can invite him into the group and allow him to use the badge to gain credibility. This puts the group at risk if he does not pay on time and so real credibility is given when someone is in a good group.

Credibility is even more important in Prosper because interest is put onto these loans by the lenders, meaning if I loaned my money to someone on Prosper, I could profit off of it by setting an interest rate. Lenders can set whatever rate they want, but are in competition with other lenders, so if you set a very high interest rate, most likely another lender will be picked. This system ensures that people get a fair rate that both sides are happy with. In addition, the lenders are not necessarily entrepreneurs like in Kiva, many are looking to pay off credit card or college debt or just need some cash for a recent addition to their family.

The intention of Prosper may seem less altruistic because of the possibility for profit, but at the same time, it allows people who otherwise would put their money into a mutual fund or other investment, to actually help out real people and see how their stories evolve because of the money donated.

These programs are not without their controversy, as people criticize it as taking away from regular donations, which ask for no money back. It also may be acting to replace government systems and allowing governments to avoid dealing with the problems locally. There also is the issue of intention of the lenders, as it may seem greedy or a cop-out to “100%” charity.

Beyond these problems, there is a lot of good I can see in these type of programs since it fills in a hole and gives more options to helping others out. I like how the system encourages work, as the borrowers do have to pay back the money and it is not a free hand out which they may or may not waste. In addition, it forces people to think forward and plan out their future, not to just hope that a surge of cash will magically allow them to make more money. Being good is never that straightforward and there are always bad sides to almost everything. Depending on your situation, this may be a great way for you to help someone and I can not really complain about getting people to do some good.

I hope you enjoyed my first feature article. If you read this far, then please tell me what you thought. And if you didn’t read this far, I hope some how I get your comments anyway haha. As always, do your own research and figure out what you think about these programs or any of the other microfinance programs out there. A great resource is The MIX Market, which lists institutions that a place like Kiva would partner with.