The Transformation of Microphilanthropy and Microfinancing

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Microphilathropy and microfinancing are ideas with similar social missions: allowing people to uplift themselves. The Dalai Lama has said that wealth should be viewed as an ability to give. More directed social and personal impacts are the goal. Both initiatives will require the development of more efficient ways of distribution and communication to reach more people.

Microfinancing involves making business loans to people that are too poor to qualify for normal-sized loans. Traditional banks have ignored microfinancing loan amounts of $500 or less. Making loans in relatively tiny amounts allows individuals to help their own lives and empower themselves.

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Microfinancing products are currently few but there are people who are looking beyond the pronounced impact on borrowers. Pierre Omidyar, eBay Chairman and his wife Pamela Omidyar have donated $100 million to his alma mater Tufts University to establish a new fund for microfinance lending initiatives. Their Omidyar Network has also invested some $15 million in microfinance institutions (MFIs) such as the Grameen Foundation USA and Unitus. The goals of their investments have been to develop microfinance investment products that will be attractive to traditional institutions and investors.

There are 10,000 MFIs in the world and in such a fragmented sector there are few efficiencies. Each institution must invest in the same startup costs without the benefit of economies of scale. Efficiencies must be found as well as ready access to capital.

“What should be happening over time is that microfinance teams figure out how to most efficiently pursue their mission and access capital to do it, those teams will attract more capital and thereby scale more rapidly, and you should see consolidation in the sector,” Pierre Omidyar told Business Week. “Out of 10,000, there are very tiny institutions that have thousands of borrowers, and they're driven primarily by their social mission. They're not really run as businesses. We're not going to get to 5000 million borrowers 10,000 at a time with a separate organization and management team for each block of customers.”

“Microfinance initiatives are very high-touch models. The loan officer meets with local groups of borrowers every week, they share tips and techniques. There's a lot of training and learning that goes o, which adds to the cost of the model. But it's a very important piece of it, because it increases the level at whichthese loans are repaid. And these loans tend to be repaid at a much higher rate than typical consumer lending. You're talking about 98% repayment rates generally,” Omidyar continues. “So that high-cost model leads a better financial model. But it's a balance. If you want to teach scale, you need to spread those costs among larger numbers of borrowers. There is room to improvethe effectiveness of everything on the cost side of the microfinance equation – everything from greater use of information technology to better record-keeping to the physical and legal infrastructure of the country.”

Microphilanthropy is similar in its goal and in that it is a different model to traditional fundraising that increases the numbers of people that can be helped. Here is a clearer example.

A donor of extranormal means may make a $1 million gift to a traditional philanthropy or a million donors of more ordinary means can make $1 gifts that can be used for more basic and far-reaching benefits. The $1 million donation can used to develop infrastructure in a foreign country or support a local community organization such as a symphony or charity. For example, a single $1 donor can make a greater impact on a greater number of individuals with the purchase of 50 vitamin A tablets that can used to restore 50 children's sight.

Both microfinancing and microphilanthropy will require more efficient distribution of loans and microgifts. We have technology like cell phones, computers, e-mail, and instant messaging to interact with each other. Better communication and connection will enable and scale transformational energy as more people benefit and are uplifted by the positive effects of microfinanced loans and microphilanthropic gifts.

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