It sure does seem like new philanthropic/social ventures are popping up all the time. As BusinessWeek declared recently, there’s A Bull Market in Social Entrepreneurs.
One of the recent entrants is UnitedProsperity.org. At first glance, it looks like a Kiva.org knock off. But there is a hugely important difference. Whereas Kiva.org helps people make loans to entrepreneurs in developing countries, UnitedProsperity.org helps people guarantee these types of loans.
A loan guarantee means that the donor is essentially providing collateral so that a local bank will make a loan to the entrepreneur. The amount of the guarantee is less than the amount of the loan. If I make a loan of $100 to you, I might have a certain degree of worry about getting paid back. But if a third party puts up $20 in collateral so that even if I don’t get paid back I still recoup $20, than I will worry less and be more likely to make the loan. In theory, this means that UnitedProsperity.org can offer a leveraged opportunity to donors where every $100 in loan guarantee money they put up results in $500 in loans being made by local banks.
That’s nice in theory, but the setup assumes that there is local capital available in the developing world but that it is not being lent out due to risk aversion. So I asked UnitedProsperity.org CEO Bhalchander Vishwanath about this issue:
Bhalchander: There is enough capital on the ground to be freed up. In fact banks in most developing countries lend much less as compared to banks in the developed world. Some banks may be even over-liquid – i.e. They have more savings deposits than lending. Guarantees definitely free up that capital.
Having said that I would state the direct delivery of new capital to emerging Microfinance Institutions is also important as banks in some countries may not engage effectively with microfinance institutions and Kiva plays a very valuable role there.
Overall I see our approach and Kiva’s approach complementary in making capital available to poor entrepreneurs.
All of this is a great example of a concept I wrote about last October: The Securitization of of Philanthropy. I wrote the post as the world financial markets teetered on the edge of collapse, due in large part to misappropriate securitization of loans in the for-profit market place. In the post I discussed how grantmakers can inject “first loss capital” into nonprofit debt financing deals to help grantees. Noting the irony of advocating for securitization given the state of financial markets I wrote:
Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.
I think UnitedProsperity.org has a fantastic concept. Let’s hope they get it right!