TCS Daily

A Private War on Poverty: Peer-to-Peer Development

By David Rusin - April 18, 2007 12:00 AM

President Bush's recent creation of the United States Africa Command, or AFRICOM, underscores the region's growing impact on U.S. national security. Africa's newfound strategic significance rests on the twin pillars of energy and terrorism. First, the continent already supplies nearly a fifth of America's oil, and this fraction is expected to increase over the next decade. Second, ongoing violence in Sudan and Somalia is an acute reminder that weak, failing, and failed states can serve as incubators for radical Islam.

The challenges faced by Africa are manifold and all too familiar: poverty, authoritarianism, corruption, natural disasters, disease, and conflict. Addressing these challenges begins with development. A developed society is more likely to evolve into a stable society — and one whose citizens demand effective, accountable governance. Such states have a greater capacity to secure their resources and manage their remaining problems. And fewer problems mean fewer opportunities for Islamists to present themselves as the solution.

Unique among combatant commands, AFRICOM will feature a prominent diplomatic component. This indicates that it will work not only to strengthen allies militarily and coordinate responses to regional threats, but also to foster democracy, rule of law, free markets, and economic growth. These efforts to reform African societies are praiseworthy and, with time, may even prove productive. However, they are emblematic of the top-down approach that — from block aid packages to debt relief — has dominated the Africa policy debate for years.

What about a bottom-up development strategy that focuses on helping individual Africans to help themselves? Moreover, could the substantial giving power of average Americans be leveraged for this task?

Enter Kiva, a small but ambitious nonprofit based in San Francisco. Kiva is a newcomer to the field of microlending, which involves the disbursement of small loans to very poor people who would have no chance of accessing traditional financial services. The modern incarnation of microlending has been around for decades, but most Americans first learned about it when the 2006 Nobel Peace Prize was awarded to Muhammad Yunus, a microfinance pioneer who is known as the "banker to the poor."

Named after the Swahili word for "unity" or "agreement," Kiva has broken new ground by harnessing the power of the internet to enable microlending by ordinary individuals. Here's how it works: Kiva partners with microfinance institutions (MFIs) that serve as "boots on the ground" in developing countries, vetting proposals from local entrepreneurs who wish to open or expand their small businesses. Viable loan applications are then posted to, along with a picture and background sketch of each borrower. Anyone with a laptop and a Paypal account can peruse the ads and lend as little as $25 to support the business plan of his or her choice.

Once the total funding has been raised, the money is transferred to the borrower via the MFI. The entrepreneur may then use the loan to purchase a refrigerator for food sales, acquire a cow for dairy farming, or repair a motorcycle for deliveries. Over time, the lender is repaid at 0% interest, though Kiva hopes to offer competitive rates in the near future. The borrower is, however, currently charged several tens of percent by the field partner to cover administrative costs.

Since commencing operations in October 2005, Kiva has disbursed over $4 million in loans and is now the most trafficked site in microfinance. Remarkably, Kiva boasts a repayment rate of essentially 100%, a testament to both the responsibility of its borrowers and the careful proposal reviews carried out by the local MFIs. The reach of Kiva has rapidly expanded as well. Having begun its work in Africa, the organization now supports entrepreneurs in Asia, Latin America, Eastern Europe, and other locales.

Conservatives and libertarians might be tempted to dismiss Kiva as just another vehicle for guilty Americans to feel better about themselves without actually accomplishing very much — the financial equivalent of carbon offsets and awareness ribbons. However, this is far from the case. Not only has microlending been shown to bring real improvement to the lives of real people, but a closer look at Kiva reveals a foundation of core conservative principles.

Kiva offers a blueprint for development that Friedrich Hayek would have appreciated. First, the focus is squarely on the individual — at both ends of the lending process. Corrupt third-world governments are bypassed altogether, as money flows directly to the people who need it. Moreover, that money originates not from the "coerced charity" of taxation, but from the freely chosen generosity of informed citizens.

Second, the funds distributed by Kiva are not handouts, and therefore do not perpetuate dependency. Money is loaned in support of specific business ventures, with the ultimate goal of promoting financial self-reliance. The necessity of repaying these loans does much to foster personal responsibility, in sharp contrast to the message sent by aid shipments or debt relief. Finally, and perhaps most significantly, these small businesses empower Africans by giving them a direct stake in their societies and economies — a necessary condition for the emergence of a democratic polity.

Among Kiva's other laudable features is that every dollar reaches its intended target. This is made possible by the organization's streamlined operations — currently supported by donors — and its partnership with Paypal, which contributes free payment processing. In addition, Kiva provides lenders with regular updates about their sponsored businesses. These reports bring to the lending experience both transparency and a very personal touch.

Despite the recent fanfare, microlending still has its critics. Some argue that the provision of loans by foreign sources exonerates governments from the need to undertake internal reforms. Others claim that proponents of microlending overestimate its potential to spur economic growth. In fact, Thomas Dichter, writing on behalf of the Cato Institute, notes that the extension of credit to the working poor has typically been a result of development, rather than a cause. Moreover, he asserts that credit is far more likely to be used for consumption than for investment.

Dichter may be skeptical about the benefits of microlending, but that represents only half of the cost-benefit equation. Kiva has driven costs to negligible levels, as nearly all loans are repaid and funds may be continuously recycled to new borrowers. Repayment does not necessarily imply that entrepreneurial achievement has taken place. However, the low costs and small risks involved do suggest that microlending is a worthwhile pursuit, even if only some of the loan recipients manage to grow their businesses and better their lives in the long term. These tangible successes should not be discounted, regardless of their frequency. Change takes place one person at a time, and that one person can serve as an example to others.

African development represents not only a moral good, but a strategic one as well. Overcoming the many problems besetting Africa is the work of generations, and no single approach can be expected to offer the definitive fix. That said, the peer-to-peer microcredit platform introduced by Kiva is one of the most intriguing ideas put forth in recent memory. Kiva helps people in Africa and other developing regions to help themselves. It is through this process that subjects become citizens.

Kiva more than lives up to its slogan of facilitating "loans that change lives." Americans of all political stripes should embrace its mission.

David J. Rusin holds a Ph.D. in Physics and Astronomy from the University of Pennsylvania. His interests include foreign affairs and security policy. He may be contacted at



private war
I agree with some of is positive points, like this plan bypasses african corrupt dictators and such. But it's still basically a 'feel-good for liberals' handout, if no market interest rate is yet charged. If no interest is charged, then everyone would be happy to get a loan because they could do a kinda 'carry-trade' on it and invest it for at least 10% interest. What about the possible corruption of who allocates the recipients? In any case I'll bet this private war will be just as successful as say, the war on drugs.

Why not?
If you truly believe in capitalism and personal charity then why not give this a go?

I did. Instead of spending $25 that I could use for drinking, I gave it to a woman in Africa in order to see if her business would take off. So far the results have been positive and I believe my drinking money will soon be returned to me. It was my money and I used it to promote the concepts I believe in.

I would dare anyone here to portray me as a "guilty liberal". I believe in the power of free markets and capitalism to overcome most of the world's problems.

>"In any case I'll bet this private war will be just as successful as say, the war on drugs."

It will be more successful since the government is not involved in it, it doesn't infringe on anyone's rights, and it is voluntary. Hardly a good comparison.

As I understand it, the loans from the lender to Kiva and from Kiva to the MFI are currently interest-free. However, the MFI charges the borrower a significant interest rate to cover its costs of operating out there in the wilderness. So it's not a freebie/handout for the borrower. There are financial consequences of accepting the loan.

Also, Kiva's website explains that offering non-zero interest rates to lenders comes with some legal complications that they are trying to sort out. But they intend to do so.

It's not significant, he said: "The borrower is, however, currently charged several tens of percent by the field partner to cover administrative costs." How can you call that significant? Also, if it's a non-profit outfit, that's another reason it's a freebie, handout, charity. But I am a firm believer that a person should be able to blow his own money on anything he wants; just like Gates, and Buffett are doing.

personal charity
No problem, I've often said that a person should be able to blow his money any way he likes. And I also do like your $25 example, instead of drinking money. But the way I do it is that I also do the drinking, then give the $25 to the girl in order to help her private personal services business take off. I'm proud to say I've committed a small fortune over the years to my personal foreign aid project that bypassed all corrupt politicians and beurocrats.

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This is a total hustle...
Honest to God. You people need to get out more. This micro lending routine is a total scam to secure funds at zero interest as working capital to underwrite a lending business that has been comfortably in place for hundreds of years in Asia and Africa.

The practice of lending small amounts of cash (at high rates of interest) to capitalize small business is ubiquitous over there.

The dominant professionals in all such markets are Indian nationals. The same families who send their sons to do such business in all those countries have been lending this way back home in India for generations. A thousand years, perhaps. They have all kinds of their own money and access to as much more as they need in their secondary markets (at high interest rates, of course, in India). However, if they can secure working capital for free from the Europeans and the Americans...well free money is worth crossing the street for, isn't it?

I live and work in the Philippines at the most fundamental operational level, with my own manufacturing entity and direct labor workers (who I trained). The lending business we are talking about is called 5/6. I asked one of our Indian friends what they call his business in India? "5/6". I asked him how long his family had been into it? "Forever".

As an example, the lender might give the merchant 7,500 pesos ($150) and he will be repaid 9,000 pesos ($180) over the course of 90 days at the rate of 100 pesos ($2) each day. That is a 16.7% (simple interest) return for three months. The effective annual rate of interest is above 66%. When the agreed to repayment timetable is shorter then that annual percentage rate (APR) will be even higher. The default rate on those loans (if well managed) approaches zero.

Such merchants or workshops in those countries have no other way to raise even this small amount of cash to purchase raw materials. They are almost certainly selling commodities (food, etc) into a consumer market that is very competitive and quite poor. There is simply not a whole lot of margin to be made over there.

A merchant in the Philippines only needs to be able to earn 200-300 pesos a day to make a living. 500 pesos would be great! Profits of 1000 pesos a day would be extraordinary.

100 pesos a day as a loan repayment is a significant part of his daily cash flow but most of that is his actual material cost. The money lender knows very well that the merchant has that much money in hand each day or he would not be in business at all.

It is important that the lender collects his small payment each day. It is difficult work for him to visit every client every day. But to let those payments build up in the hands of the merchants, who are living in the very same poverty as their customers, would tempt such clients to use those funds for things their families really do need.

By the way, the idea that such borrowed funds are fueling consumerism in those countries is completely specious.

The Indian lender always rides a powerful motorcycle as he makes his daily rounds. Occasionally his wife sits on the back and she might walk into the stores to collect the small payments. It is all very friendly. Really.

A good lender has a long standing relationship of trust with each of his clients. He can tell if business is OK just by glancing around the shop. He may have funded the merchant's initial, small launch years before. He financed the business as it grew. The money lender fully understands the operations of his clients. He has every reason to believe that he will be paid.

If he is not making his payments then the merchant will be unable to finance his next load of raw materials. The money lenders knows, very well, that his clients cannot save much money day to day because they are as poor as everyone in the country and their children must be fed.

If the merchant fails to pay the Indian money lender then he should not expect to borrow money from any other Indian player in the local market ever again. And he is no longer in business.

The actual amount of any such loss would be relatively small and the money lender's portfolio should easily absorb the occasional hit.

The merchant cannot ask the Indian lender for a payment moratorium as he might if he borrowed money from his own relatives or from another local national. For this reason, 5/6 operations owned by Philippinos typically fail. The loan simply doesn't get paid.

In all such poor, developing nations any viable opportunity to make money through traditional (5/6) is already being served. Incremental, micro lending funds (at zero cost) entering the system only make this business more profitable. The operatives on the street (and on their motorcycles) are probably the same guys as always.

In any case, the Indian families who own, operate and underwrite these businesses are headquartered back in India. They have access to virtually unlimited funds and manpower to expand operations as quickly as there should be markets to be served.

The formalization (by Western parties) of micro lending in these Asian and African markets has added zero new opportunities for local economic development. All such businesses were already fully funded. Any fresh opportunities were easily covered.

The idea that Muhammad Yunus won a Nobel Prize last year for funding his banking operation (founded during 1976 in Bangladesh) with free money from the West is actually pretty funny. One of my Vietnamese friends whose family was successfully in this same business for generations in her homeland (and who competed with the local Indians there) is actually upset that Western people are so much out of touch with Asia and Africa that they bought into this scam.

This is one of the most fundamental elements of Asian and African economics in those nations with weak central governments, questionable rules of law and limited commercial banking. If Western policy makers do not understand this much then their efforts to introduce financial capitalism and the benefits of global economics over here are hopeless.

A Nobel Prize? So stupid.

re Forest's
I live in asia too and see this stuff all over the place, so concur with his big post above. Since it's expensive credit tho, it would be better if they adopted deSotos idea of trying to normalize private property, so people could mortage it in a normal way, for normal market rates of interest.

Cost of doing business
One cost of doing such business is crime.

A 'bumbai' has his motorcycle stolen and held for ransom.

Or maybe the NPA don't get thier cut and whack the Indian.

The most important feature of any successful economy is rule of law and trust. When so much money must be paid for 'protection' the people remain peasants.

That's why rule of law and protection of private property is so important.

Hey...very good...

I did not get into the issues surrounding criminal third parties trying to take off the Indian money lenders.

Of course, they carry only a little bit of money when they make their collection rounds. And they are riding powerful motorcycles through narrow, crowded streets. So they should be difficult to rob and not much of a prize. Attacking their homes would certainly be a tough undertaking. And you would not find their money. Kidnapping of these Indians does occur but the ransom involved is usually a small number (about $1,000).

We live in Cavite. The incidents I have heard of involved an amateurism mugging at the covered market and in broad daylight as the Indian guy was stopped to make his collection rounds. Stupid and pointless.

We have very well established, organized crime in Cavite. No significant New People's Army (NPA) presence and no Abu Sayyaf. Almost no kidnapping. If the Indian money lenders are actually paying anyone then this would be a very routine arrangement in Cavite with little risk of confusion. Such protection payments may not be happening at all. I have never heard of this as a source of cash flow for the players in Cavite. Of course, there is jueteng (numbers gambling) and certain other businesses...

I cannot speak for the North where the NPA is strong or the South where they have Abu Sayyaf. These are groups of amateur criminals. Disorganized crime is always unpredictable and disruptive.

Tribal society...
In the Philippines the tribal nature of the larger society was never broken. There was never a king who merged all the small groups into a single culture. There is no history of a strong central government. (Colonial rule does not count.)

A strong central government feels unnatural in Philippine society and democracy delivers a weak government for us.

Without the central government mechanisms historically mobilized to collect tax revenues (to support a large imperialistic army, for example) our modest tax base cannot underwrite a payroll for government workers to enforce the rule of law. Such officials are barely paid and they must make their living through gratuities. Bribes. They enforce our laws arbitrarily until they are paid.

Without the predictable rule of law regarding property and contracts it is impossible for financial capitalism, as we know it, to operate. Banks cannot collateralize their loans with clear titles and banks cannot rely on the courts to enforce loan agreements. Banks cannot fund industrial development with small companies growing up to become global players. The economy simply never matures.

We need to learn how to make such economies productive without waiting for a strong central government. Otherwise, without a competitive economy to be taxed (the old chicken and egg dichotomy) we should prepare ourselves for a very long wait. Such nations can only feed themselves by allowing their people to be exploited by foreigners.

There are lots of countries all over the world in precisely this same situation. Solving this business problem is a huge deal. (Hint: small banks.)

everyone is kvetching
A few comments on the comments:

* America's domestic "war on poverty" has forcibly extracted trillions of dollars from taxpayers' pockets during the past 4+ decades, with few notable returns. In contrast, this "private war on poverty" is not only voluntary, but these volunteers get their money back as well. The only "charity" is that you forgo the whopping $1.25 you would have made on each $25 (assuming it's in a 1-year CD). Even if only a fraction of the borrowers do something useful with the money, it seems like it could be a worthwhile enterprise. Where's the risk for the lender?

* Should we discount the success stories provided by Kiva? Again, even if these are the exceptions rather than the rule, such modest rewards would still seem to outweigh the costs/risks involved, no?

* Of course property rights are vital. Perhaps one day the Mugabes of the continent will be replaced with modern-day Jeffersons. But until that happens, it behooves us to promote the economic well-being of the little guy, in the hope of gradually spurring upward pressure for reform.

* I think someone has an unhealthy fixation on Indians riding motorbikes.

I heard it happening around Cabanatuan.

The opportunity to take money away from Americans and Europeans through this micro lending scam relies on the well meaning naivete of intelligent people who really want to buy into such a good story. The Nobel Committee even went for it.

Of course, if you have never lived in Asia or Africa then you cannot imagine how compelling big, bad Indians on big, black motorcycles must be.

Actually, it never occurred to me before, but some people might find this image sexy. Thanks for pointing that out.

Go figure.

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