Micro Loans Provide Big Help to the Poor

EDITOR'S NOTE: This article was originally published in the February 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.Lucy Billingsley enjoys helping poor people in developing countries expand their small businesses. "I can give a woman the same opportunity I was given," says Billingsley, 55, a real estate developer in Dallas.

Billingsley has lent money through the Grameen Foundation's Growth Guarantees program, one of a growing number of microfinance initiatives. The programs extend tiny loans to poor entrepreneurs, mainly women who live in rural areas.

The initiatives enable many individuals to pool their money, which will be used to guarantee or make loans. The pooled money goes to microfinance institutions, usually small banks or nonprofits that lend money to the poor. You're likely to get your principal back, but returns range from zero to the single digits.

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The loans, typically for several hundred dollars, help people start or expand small businesses. One borrower bought a buffalo that produces milk that can be sold. Another purchased leather for a shoe shop. "This idea of seeing the poor as part of the solution, not the problem, is really a new idea," says Fiona Ramsey, of Kiva, a Web site where people lend money directly to borrowers.

To find microfinance investments, check the Web sites of MicroPlace.com, Mixmarket.org and MicroCapital.org. Here's how some of the programs work.

Loan guarantees. Founded in 1997, the Grameen Foundation (www.grameenfoundation.org) helps 34 million people in 24 countries. In 2005, it launched its guarantee program, which pools donors' money to serve as collateral for securing loans to microfinance institutions. The pool now has $60 million.

Donors must pony up $1 million, which stays in a conservative account for five years, says Grameen President Alex Counts. Donors' money is spread among institutions, so the risk is low. "Unless there's a default, you're going to keep the principal and earn on it," Counts says.

If you don't have $1 million but like the idea of loan guarantees, consider a donor-advised fund at Schwab Charitable (www.schwabcharitable.org). You can direct up to 10% of your fund to guarantee loans for at least two years. "This is a way to put your money to work without having to give it away," says Kimberly Wright-Violich, president of Schwab Charitable.

The money remains in the donors' accounts and continues to be invested. During the period when part of your account is tied up with the guarantee, you can direct the rest to charities of your choice.

Direct loans. On Kiva's Web site (www.kiva.org), you can scroll through pictures and descriptions of borrowers and choose a loan recipient. "A lot of people want to know that their money is going to help an individual person," says Kiva's Ramsey.

You can lend as little as $25. Kiva sends money to a microfinance institution, which distributes the money to individuals you chose on the Web site. The institutions interview borrowers to make sure they're good credit risks. Lenders do not earn interest.

One recent prospective borrower was a 50-year-old woman in Ghana. She's a fish monger who needed $400 to buy fish in bulk and bigger refrigerators.

Defaults are possible, says Ramsey. However, she says, "You're serving people who are incredibly motivated to repay the loan."

Investment funds. A growing number of funds are attracting small investors. Investments are pooled and placed with microfinance lenders. One such vehicle is the Calvert Community Investment Note (www.calvertfoundation.org). You invest a minimum of $1,000 and choose an interest rate of 0% to 3%. About 10% of investors choose zero interest. "That gives us more flexibility to offer more affordable rates to the organizations," says Carrie McGarry, the foundation's marketing manager.

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