Is a microcredit different from a payday loan? – Non-profit news
January 12, 2016; Hyperallergic
More and more philanthropy is funded by crowdfunding, and more and more sites are vying for donor attention. Most highlight the sincere stories and hide the underlying costs and meager return on investment. Yet once the costs are assessed, the variations are staggering.
The meaning of Stephanie Rothenberg’s new project at the ZKM Center for Art & Media in Karlsruhe, Germany, “The Garden of Virtual Kinship”, is hidden at first glance. Visitors are captivated by the plants that grow and flourish in individual glass planters. Each plant waits its turn to be watered, but you can’t help but notice the large amount of water that escapes and that thirsty plants lack. As your eyes follow the leak into the large reservoir below, you realize how much water the plants could receive, if only the leak were fixed.
The project, part of the exhibition GLOBAL: infosphere, examines the costs and return on investment of crowdfunding and microcredit. Each plant represents a campaign in a certain region of the world listed on the crowdfunding site Kiva. When a donor makes a donation, a plant is watered, but more water drains into the reservoir below. Leaking water represents money that does not reach the borrower due to the high interest and fees charged by the site.
Combined with a second project, “Planthropy,” presented at Manchester’s The Lowry, showing how social media affects philanthropy, Rothernberg explores “the intersection between social media, finance and philanthropy,” Rothenberg said. Hyperallergic. “Both pieces question what it means to donate with the click of a button.”
Why are the costs of microfinance so high? Part of this is due to the nature of the industry itself and the need for scale. Many microfinance sites search for and authenticate the site’s projects. These activities are expensive, especially in developing rural areas. There are also costs incurred to market and connect the sites to social media, creating a platform that donors are drawn to. Other considerations include the method of calculating interest. Overall, these costs are an acceptable percentage on a $ 10,000 loan, but for a $ 550 or $ 1,000 loan, those same costs are a much higher percentage.
Many donors are drawn to the stories and fail to consider the investment costs and meager returns. Microfinance sites point out the possibility of using the funds more than once as the initial loans are repaid, but once the fees are added, the amount that can be credited back is minimal. Additionally, donors often ignore the low rate of return as many sites hide costs and fees. Some studies even suggest that high interest rates and fees have similar effects on borrowers as payday loans in the United States.
Rothenberg calls on donors to research these sites before investing and ask the tough questions: Does the return justify the donation? What is the cost of the loan to the borrower? What is the method of calculating interest payments? (She would also like them to share their findings on social media.)
But microcredit sites charging high interest rates and fees are not the only models. Another option is to support institutions that create tools to help people in developing countries save. Often times, group savings can fuel similar opportunities without the fees and high interest rates. Additionally, since little money is actually reallocated, donors might consider donating instead of lending. Websites like GivingGrid only charge a credit card fee and ask donors to make a second donation to the site to cover its costs and mission. Another site, Benevolent, is a non-profit organization that collects donations from foundations and individuals to cover its costs. Caring partnerships with other nonprofits to validate the client’s need, and since the donation is channeled through the nonprofit organization, donors can deduct their donation from their taxes.
As donors research and invest in sites with lower costs and fees, the competition will strive to lower fees and increase return on investment. – Gayle Nelson