The New Yorker has a fascinating article about the limits of microloans — you know, the small loans that usually go to budding entrepreneurs in developing countries. Or perhaps familiarly, the kind of loans promoted by Kiva, which I wrote glowingly about here. The main issue’s that these microloans are usually going to one-person businesses, most of which aren’t looking to hire employees:
in any successful economy most people aren’t entrepreneurs—they make a living by working for someone else. Just fourteen per cent of Americans, for instance, are running (or trying to run) their own business. That percentage is much higher in developing countries—in Peru, it’s almost forty per cent. That’s not because Peruvians are more entrepreneurial. It’s because they don’t have other options.
The author, James Surowiecki, says the developing world needs “more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation.” The point here is not that microloans to teensy businesses are bad, but that somewhat bigger loans to somewhat bigger businesses might be more effective and helpful.
Even as I love the idea of the teensy mom and pop shop or the lone writer (me!), I’m wondering if the next Kiva loan I make should go to a small biz, not a one-woman shop. Kiva does, after all, list many different types of businesses —
My Kiva loan to Maribel Del Carmen Rodriguez a couple months ago is already 25% repaid, btw. I’ll soon be ready to reinvest — in a multi-employee business!
[crossposted on BlogHer]
Update, 12/3/08: How to make Kiva-like loans but earn interest on your money.
Hey Siel! This made me think about something I read recently at the website of The Working World, which makes loans to democratic worker cooperatives in Argentina. It’s an organization I donate to but I’d never really connected it in my mind with microcredit– but they have an interesting take on it and call their approach the next evolution in microcredit: http://theworkingworld.org/?action=theory&subsection=nextEvolutionArticle
Comment by Penny Nickel — March 10, 2008 @ 9:17 pm
whew! i was starting to feel bad about the kiva thing when i saw the title of your post. i heart james surowiecki, so i’m inclined to agree. and for sure kiva seems to have a fair amount of co-ops listed on there. so def let me know how it goes when you re-lend.
Comment by erin — March 11, 2008 @ 8:13 am
You are absolutely right. The advantage to small to medium businesses is not only do they provide employment but they build community.
Comment by arduous — March 11, 2008 @ 4:27 pm
I’m not sure that sole proprietors fail to build community–after all, their businesses generally are based in their communities. And while they may not generate jobs today, is there a reason why a successful business might not be able to expand to one or two more people in time? Surely there’s room for both types of microloans.
Comment by Kate — March 12, 2008 @ 6:04 am
Thanks for the link, Penny Nickel!
Kate, I think you missed the “The point here is not that microloans to teensy businesses are bad, but that somewhat bigger loans to somewhat bigger businesses might be more effective and helpful” part.
Comment by Siel — March 12, 2008 @ 2:57 pm
I have recently started a non-profit microfinance fund with what I call a capitalist twist. Hoping that through shopping and not donations we can raise money to make microfinance loans. The loans are intended for people to start businesses that engage in protecting the environment, education, sustainable living, fair trade, and organic industries. With the recent credit crisis in this country and it spreading across the world, banks are making it even more difficult to get the needed money for not just housing but business as well, especially without a stellar credit rating. So now more than ever it’s important for people to have the ability to access money through different avenues.
It would be nice to loan money to a set business with employees or a person who has intention of hiring employees. That clearly would be anyone’s goal but when it comes to countries in absolute poverty where infrastructure is limited, it becomes difficult. A lot of these people are looking for loans to serve their own village whose size is limited in scale. So buying a cow for milk or a loom for textiles is all that is needed.
If you are looking for them to hire a few employees they need to have distribution, which isn’t easy when you need a car, roads are in disrepair, phones, etc. The money required for this is a lot more than a typical $50-100 dollar individual loan. The more money in one place the more risk assumed. The article sited mentions Google.org (everyone by now knows Google), the Soros Economic Development Fund (George Soros an investment billionaire), and the Omidyar Network (Ebay money) who are entering into a larger business microfinance area. They all have one thing in common, incredible wealth. When you have that kind of money you don’t have to worry about risk and should throw it around to help people. At the end of ones life the scorecard shouldn’t be how much money you had, but what you did with it.
Comment by Adam — March 14, 2008 @ 8:53 am