One of the nicest gifts I've ever received was from a friend who contributed, in my name, to a loan for a single woman raising four grandchildren in Uganda. The loan of $1,250, made through , helped Mary Nakayima buy more soda, mineral water and beer for the pub she runs near her home.
The practice of people loaning to individuals is known as "microcredit" and it has become a popular alternative to giving charity to those in developing nations. Organizations such as Kiva let people lend small amounts of money online to entrepreneurs like Mary who are trying to get out of poverty.
Despite their hardships, most of the borrowers are good for the loans - Kiva reports a repayment rate of 98 per cent. Lenders through Kiva, a not-for-profit organization, don't get paid interest, but do get to feel good that their savings are improving lives.
"It was really easy to do and made me feel a lot better than just buying more stuff," says my friend. "I'd say the only negative is that there were too many people who were totally inspiring, interesting, and deserving, and I couldn't afford to give them all money."
Last month, its service is now available to small businesses in the U.S. That the group sees a need for micro loans in a developed part of the world clearly indicates that the banking system is simply not working for struggling families and businesses.
Since the subprime crisis and the burst of the real estate bubble, many Americans cannot get a traditional bank loan. "To fill this financing gap," , "an increasing number of borrowers are turning to 'peer to peer' networks that connect individual borrowers directly to lenders, cutting out the banking middleman."
According to Fisman, these networks have now financed nearly $500-million (U.S.) in lending.
On sites such as , and , there are thousands of borrowers lined up for loans to spend on home improvement, education and business ideas.
Unlike Kiva, these groups charge interest and offer attractive returns on investment for lenders. For example, at MicroPlace, a micro investment company owned by eBay, you can earn as much as a six per cent annual return on some opportunities. Since these loans qualify as investment contracts, MicroPlace is registered as a broker-dealer in the U.S. Prosper.com and Lending Club are both currently seeking regulatory approval from the Securities and Exchange Commission.
While peer-to-peer lending is taking off in the U.S., no comparable service exists yet in Canada, although it appears some efforts are being made. promises on its website that it is "coming soon", but it may be some time before it can get clearance from securities regulators to operate.
As an investment, micro loans are subject to all of the standard risks and uncertainties. If you do invest your savings, you face the possibility of delayed payments or even defaults. However, as an act of charity with the opportunity for payback, micro lending delivers rewards.
With one month to go on her payment term, Mary Nakayima had repaid 92 per cent of her loan. I like to think about the thriving pub she has built and the community that has benefited from her efforts.