Banking on people

Microlending is a concept that puts the power of banking in the hands of everyday people allowing any individual with some money to spare to invest in the poor.  Whether to support developing nations or even those around them, microlending is a tool that if well utilized, has the power to be world changing.  Could microlending change the way we approach financing in Bermuda?

Microlending is developed around the principal of dividing up loans to individuals into very small denominations allowing many people to split the risk of lending to the poor and those with bad credit.  As the theory goes, if you have $500 to invest and you divvy it up into 20 microloans of $25 apiece, you can diversify your risks that any one loan of a handful will default, much like regular banks do with much larger sums.

Kiva.org is just one example of microlending at work.  Using the power of the Internet, Kiva.org allows individuals from around the world to view the profiles of entrepreneurs in developing nations and decide whether they’d like to contribute to their goals.  Kiva.org provides the service of profiling entrepreneurs, their plans and their finances and providing a portal through which individuals can loan as little as $25 towards any individual’s borrowing goal.  Once that individual has gathered enough funding through various $25 “microloans” from numerous individuals, the loan is fulfilled.  The people behind Kiva.org then manage the loan for the stated term and when the loan is repaid, you get your money returned to you.  While interest payments go towards funding operations, Kiva.org has proven an effective means to help those in need by giving when you may not have allot to give.

Prosper, is another very different example of microlending at work.  Prosper allows Americans to lend money to other Americans by taking the concept of a bank open source.  Essentially, prosper profiles individuals in need of a loan similar to how Kiva does.  However, in Prosper’s case, it is possible to not only view further info such as credit ratings and endorsements but also to bid on the interest rate that you’re willing to offer. 

Similar to Kiva.org, Prosper utilizes the concept of microlending to allow you to diversify your loans across multiple individuals so that you can reduce your risks against loan defaults and thus make it less likely you’ll lose money.  In the case of a default, Prosper sells the debt to collection agencies just as a regular bank would and gives you the proceeds.  As an added fascinating feature, Prosper provides statistics on each category of credit and the number of defaults associated with each so that you know your approximate risks when lending.  Amazingly, when you consider defaults and fees, all levels of credit on average provide returns of approximately 10% annually, which is better than you’ll get from the average stock market index.  Sadly, Prosper doesn’t accept funding from non-Americans.

Could microlending be used to in Bermuda?  What if one Bermudian had the opportunity to fund another Bermudian entrepreneur?  What if local and international businesses could look up the profiles of local entrepreneurs and local charitable organizations and choose to partially donate to or fund their cause based upon their stated need?  Could Bermudian entrepreneurs, those in poor financial straights and charitable organizations benefit from an open-source approach to acquiring financing? 

Microlending puts the power of banking in the hands of everyday people and has the power to change the way we look at entrepreneurship here in Bermuda.  It’s been used successfully to empower individuals in developing nations and is continuing to offer success to those in developed nations.  It’s a world changing concept that could well have great potential benefits to empower Bermuda.

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4 thoughts on “Banking on people

  1. One thing that has to be kept in mind is that bad credit risks are bad credit risks, no matter who is doing the lending. If a bank or other financial institution deems an applicant to be a bad credit risk, why would you want small investors lending to them. Those small lenders cannot afford to take capital losses like banks can, with their diversified revenue streams and reserves for bad credit events. Why would a small investor want to be saddled with a borrower whose ability to repay their loan is iffy at best, when they can invest in other financial products that offer a far more dependable return? The banks have been falling over each other to lend into the mortgage market, introducing all kinds of new products with lower qualification requirements, such that Bermuda has never seen before. If someone doesn’t qualify for credit in this market, then I certainly don’t want to lend them anything!
    I can understand the desire to help out the poor, relatively speaking in Bermuda, but signing up individuals to contractual obligations that they can’t fulfill will not help them.
    How many folks here that can’t afford to buy a house nonetheless spend much of what they do have on fancy cars or boats or flashy clothes. Show me the “poor” person who doesn’t fritter away what funds they do have and works hard and lives earnestly, and I might be more willing to lend to them.

  2. Geoff,
    Perhaps you should visit the prosper.com site and take a look at the types of loan requests along with the statistics with regards to risks and delinquencies.
    I get very tired of hearing the arguement about people with fancy cars as a reason for why noone deserves any help. Yes there are some people who waste money, however it is false to act like everyone does.
    In reality, if it takes a lifetime of saving to be able to buy a house, why would anyone do it? If you’ve got no hope, why not achieve the simplier luxuries to at least make life a bit more enjoyable.
    I don’t know about you Geoff, but there are lots of people saddled with really high rents who work hard struggling to save much of anything that don’t have flashy cars, boats or clothes. Not everyone on this island is as well to do as some people like to make them out to be.

  3. Interesting post Dennis. I read an article about a year ago in the Economist about an Indian entrepreneur who had built a very successful bank there exclusively offering microloans.
    I think its a valid concept, particularly when the loan is used to purchase income producing goods. The trick is, as Geoff almost said, separating those who are poor by circumstance from those who are poor from mindset.
    Geoff, the reason behind offering those loans is the high rate of interest. Small loans allow a lendor to charge what might otherwise be considered a usurious rate. A $25 loan with a service fee of $2 and interest of $3 amounts to a 20% rate of return. Because its only 5 bucks the lendee won’t feel cheated and government is less likely to get involved. Over a large enough lending group that’s a hefty profit even if defaults are higher. This is true 1) because of the rate of return and 2) because losses are relatively small.
    All that said, I don’t think Bermuda has enough population to allow for proper diversification particularly given its affluence. I’d also worry about collecting when your hired goons are the Ace boys of the guy who defaulted. This type of thing would be better suited to a larger island.
    I could be wrong though. It would be interesting to see if defaults were higher due to either the culture of low responsibility or lower due to the crazy amount of money floating around and lack of competition.

  4. Denis,
    Don’t get me wrong. I don’t think that everyone is living beyond their means with flashy cars and clothes, but so often the folks I see creating noise about being less fortunate and not being able to get ahead are those very same folks. I guess, by their very nature, the hardworking and thrifty folk who do not fall prey to that stereotype keep quiet and go about their lives with stoicism.
    What I should have said was that I am all for helping folks who are helping themselves. I am more than glad to see these concepts come to fruition for these folks. What I don’t like to see are handouts to those who feel that their problems and their lack of achievement in life is everybody’s responsibility but their own. We all have obstacles to overcome in some shape or form.

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