On microfinance and subprime

There are rare days when you glimpse the World beginning to change. When you see something that only previously existed in your
imagination become reality. Yesterday Kiva began lending in the US and microfinance came to the West.

This is not the first time an innovation had debuted in the developing world only for the West to follow later. The idea for flash memory based low-power PCs began with One Laptop Per Child trying to come up with a computer for poor children. Someone at ASUS realised it was a good idea for everyone and the Eee PC was born.

We are now seeing something similar in finance. The credit crunch has led to the drying up of finance and has particularly affected small businesses. Governments have tried to help but the tools at the state’s disposal are macroeconomic and as such relatively blunt. Interest rate cuts and quantitative easing get money to the right people by flooding the economy with money. This seems to me rather haphazard, by contrast microfinance relies on the judgment of people to get money to the right people.

Kiva is using the same model as it does for entrepreneurs in the developing world. Relatively small amounts are lent through a field partner at 0% interest. Their bios go up on the Kiva website and lenders decide who to lend to. My choice was a cobbler in Manhattan. But Kiva is not the only innovator, Zopa is a commercial p2p lending site based in the UK. It is a great service and slightly different from Kiva in that interest is charged and it is a for profit commercial entity. Zopa is also more focused on personal loans.

What makes microfinance great is not just the money but the thought people give it. In the Kiva model there is a field partner who will deal face to face with the borrower and after that each individual lender is given enough information to exercise their own judgment on who to lend to. This approach is the opposite to the subprime model in which a salesman pushed loans on behalf of a distant monolithic lender who then packaged up the loans with disastrous consequences. The essential problem was that nobody really paid much attention or cared, the loans were cranked out and sold on without any judgment being exercised. For all the pain that has been caused it may be worth it if that model is cleared away so something better can take its place.