Microfinance refers to a set of financial products – often small working loans – provided by banks or non-profit organizations to individuals or groups. Often, the borrowers are low-income and unbanked, meaning they have very few other options for accessing finance. The development of lending platforms has enabled individual investors to provide microfinance to end borrowers anywhere in the world. In this post, we’ll highlight the opportunity for individual investors to do microfinance investing to help African refugees.
Microfinance started in the 1970s when Muhammad Yunus, an economics professor, conducted an experiment in a village in his home country of Bangladesh. He provided a personal loan to a group of 42 women to help them start a business. The women makers of bamboo stools boosted their productivity and repaid the loan in its entirety. Yunus’s loan program established the basic principles of modern microfinance: combatting poverty through microcredit and primarily serving women in developing countries. Today, women continue to have the highest repayment rates of borrowers across all locations.
Microfinance Lending to African Refugees
Rwanda, a small landlocked country in central Africa has a population of 12.3 million people. It also hosts 175,000 refugees, mainly from neighboring Burundi and the Democratic Republic of Congo. Like refugees around the globe, most survive off meager United Nations (UN) stipends. However, the global refugee population continues to grow and UN refugee funding is constrained. Both the United Nations High Commissioner for Refugees (UNHCR)and individual refugees themselves are looking for sustainable, private sector options for improved livelihoods.
Some refugees start small businesses to supplement the stipend. As said by one refugee in Rwanda: “The only form of support in the camp is the UNHCR stipend, and without a business, I don’t see how I could do any better for my family. In a few days you get hungry with the UNHCR stipend. It’s not enough.”
Rwanda is one of the few countries that allow refugees to legally start businesses. African Entrepreneurship Collective (AEC), a non-profit with 7 offices across Rwanda and Kenya, helps refugee entrepreneurs to establish and grow their businesses, using training and access to microfinance products. Inkomoko is the Rwandan affiliate of African Entrepreneur Collective. In Kenya, AEC operates at AEC Kenya.
AEC is a registered Rwandan microfinance institution (MFI), registered by the Central Bank of Rwanda to provide microloans to refugees and the host community living in the surrounding areas.
AEC’s funding for loans to entrepreneurs come from individual investors who invest via the San Francisco based microfinance crowdfunding platform Kiva. Financed by investments made on Kiva and donations, AEC is the largest lender to refugees in sub-Saharan Africa.
Kiva is a non-profit organization that enables microfinance in developing countries, as well as the US. It was founded in 2005, has 1.9 million lenders, 3.6 million borrowers in 77 countries. $1.47 billion of loans have been funded through Kiva. Kiva works with “Field Partners”, local organizations working in communities to vet borrowers, provide services, and administer loans. AEC is one such Field Partner.
AEC and Kiva
AEC provided its first Kiva loan to a Rwandan entrepreneur in 2013. Sara Leedom is COO and Co-Founder of African Entrepreneur Collective (AEC). Sara said of Kiva: “We went with Kiva because they offer two amazing things: 0% interest on their capital to AEC, and they assume all the default risk. If our borrower defaults, AEC isn’t liable to repay back to Kiva. This structure actually allows us to be more risk-tolerant. We can lend to populations like refugees, who are unable to access financing from other institutions.”
How Individual Investors Can Invest and Help Refugees
Individual investors can invest in small borrowers around the globe on Kiva for as little as $25 USD. Investors select borrowers to whom they want to lend. Borrowers can be selected based on their country and/or category. Categories include women, eco-friendly, crisis support loans, conflict zones, education. Kiva then provides the financing to Field Partners, like AEC, who in turn provide loans to borrowers.
As the borrower repays the loan to the Field Partner, the principal of the loan is returned to the investor’s account. The repaid loan can be used to make more loans to other Kiva borrowers, or it can be withdrawn. No interest is paid to investors. Kiva’s repayment rate is high: 95.6%. However, it is worth noting that there is a chance that investors will not be repaid.
Microfinance Interest Rate Controversy
Flags have been raised about the challenges of microfinance. One such challenge is that microfinance institutions have been found to charge interest rates of up to 200%. On Kiva, interest rates are set by Field Partners and assessed by Kiva. Investors can view the average APR of Field Partners to ensure that the rate feels appropriate. AEC, for instance, charges an average annual percentage rate (APR) of 9%. If an entrepreneur was able to access a loan from a traditional bank in Rwanda, the minimum lending rate is, as of July 2020, 16.9%.
Microfinance can offer individual investors an impact-first way to invest. Kiva provides investors an opportunity to build a portfolio tailored to their impact priorities. Field Partners like AEC help ensure that investment results in impactful and fair lending.