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Microfinancing and micro loans; Charity or Investment?
Topic Started: Jan 3 2008, 08:06 AM (93 Views)
Axtremus
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HOLY CARP!!!
I've been looking at microfinancing and micro loans lately.
(Introduction: http://en.wikipedia.org/wiki/Microfinancing )

There are many good things to be said about the whole concept of microfinancing (help very poor people help themselves, let them experience capitalism, let them build self-confidence, enable them to start or expand their own businesses to better their families' finances, lots of spill over effects that benefit their communities) as opposed to straight charity. It's like "loan them a few fishing rods" versus "just give them fish"!

I've also looked at http://www.microplace.com , a website that allows "retail investors" to put money into (charitable) organizations who will, in turn, use that fund micro loans.

As listed on microplace.com , most loan terms look like this to the "investors":
* 3% interest a year, 36 month term
* 1.5% ~ 2% interest a year, 24 months term

As "investments," that's surely some pretty lousy returns -- your risk free FDIC insured "withdraw anytime" savings account in a US bank can handily beat that at 4% a year interest. So it would take a lousy capitalist to choose to lend at 3% a year for three years rather than to save at 4% a year risk free. Yet, an important premise of microfinancing is to run the debtors through the capitalistic system rather than just continue feeding them as charity cases.

So how much of microfinancing is "charity" and how much of it is "investment"?
Would you put your money in deals that make micro loans to the very poor?
If you would, would you think of it as "investment" or as "charity"?
If you think of it as "investment," would you say that you're making "good investments" seeing the poor financial terms?
If you think of it as "charity," what have you given up for this charity, since you WILL be collecting principal and interest, after all? Is giving up a % point or two, putting up with a 24~36 month loan term, and taking a little bit of risk "charity"?

I don't have answer for the above since I've started thinking about it.
Just wondering what your thoughts are.
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Jolly
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Geaux Tigers!
Charge a little more interest, and it then becomes a viable investment. I'm thinking something in the 5-6% range is not onerous and will certainly get the job done.

I don't see it as charity as much as responsible business. When a business can be started through a microloan becomes successful, it eventually creates more need for goods and services. Given enough successful businesses, it can propel an entire economy forward.
The main obstacle to a stable and just world order is the United States.- George Soros
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