Stuff You Should Know - Could microlending develop the world?

Episode Date: September 10, 2009

Microlending is a practice that provides funds for entrepreneurs in developing countries who couldn't normally get loans. Tune in as Josh and Chuck discuss the pros and cons of microlending in this podcast from HowStuffWorks.com. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Unlike other cards, it estimates how much interest you'll owe and suggests moves to help you pay off your balance faster. Also, you can keep more of your money. Apply now in the wallet app on iPhone and start using it right away. Subject to credit approval. Interest estimates on the payment wheel are illustrative only and may not fully reflect actual interest charges on your account. Estimates are based on your posted account balance at the time of the estimate and do not include pending transactions or any other purchases you make before the end of the billing period. Brought to you by the reinvented 2012 Camry. It's ready, are you? Welcome to Stuff You Should Know from HowStuffWorks.com. Hey, and welcome to the Josh and Chuck Electric Freakout featuring Matt. Guest producer, Matt.

I'm standing in. You may also know it as Stuff You Should Know. Right, Matt of Lions and Scissors. Yeah, playing soon. Killer Band. They have a MySpace page right, Chuck? Yes. Yeah. We've plugged it before.

No, which I think we just did, though, buddy. That's right. Chuck, I don't know if you're paying attention or not, but the United States pretty much dominated the 20th century in every way you can see. USA. USA. Exactly. That was chanted quite a bit. Mm-hmm. You remember Rocky? Oh, yeah.

Beat the Russian guy. Yeah, sure. That was just one accomplishment of many. Rocky Four? Five. Rocky Four. Right. So, yeah, we successfully fought just about every war we engaged in.

Yeah. Our economy just thrived. Did you know that the per capita GDP in 1900 for the United States was $4,096? Not bad. Not bad. For that? By 1999, it was $9,671. It doesn't seem like that much of an increase.

No, not for that time. But think about the population increase. So, actual GDP in 1900 was $28.6 billion. Wow. And 1999, it was $9.268 trillion. Wow. Yeah. So, basically, we rocked the hizzy during the 20th century, right?

Now, it's 2009. It is. We're engaged in land wars with insurgent groups in Iraq and Afghanistan. Yes, we are still. And I guess you could replace engaged with mired. Mired. Maybe. The dollar is being abandoned or considered being abandoned as the universal currency

in favor of a basket of currencies, which spells trouble. A cornucopia. Yeah, that's another way to put it, buddy. And our housing market caused a worldwide financial collapse. Yes. So, America's not looking quite as bright and shiny as we used to. Before we get tons of emails saying it wasn't just that. It was.

Had a lot to do with it. So, this has caused a lot of people to wonder whether the turn of the 21st century was actually the end of the American century. Right. You know, especially with the rise of BRIC, Brazil, Russia, India and China, and specifically India and China, their enormous development has made people think, well, China's the next United States. Right.

Well, I know everyone always thinks that it's hard to not be in the moment and realize that the greatest civilizations always fall at some point. Sure. It's going to happen. I mean, it may not be anytime soon, but fast forward a thousand years and America might be a barren wasteland like the Matrix or something. Was it a barren wasteland? I don't remember.

Yeah. I remember when he showed them on TV and it was this, you know, destroyed matters. It's not an interview. Yeah. I'll go with the general consensus. This is the real world. That's right. Yeah.

Yeah. Yeah. Anyway, but we'll have our day. I say, I'm with you. I say that the United States century, the American century is not over yet. I agree. And the reason why is I think that during the 20th century, the American dream, this idea that everyone has an equal shot at pursuing his or her own goal under the free market

capitalist system, which is not true, but it's a nice thought. I think, but I think that thought the American dream, whether it's possible to realize it or not, was so successfully packaged that it was able to be exported to the rest of the world. Right. And it caught on. Sure. Have you ever heard of Thomas Friedman's Golden Arches theory of conflict prevention?

Does it have to do with McDonald's? Yeah. Then I have heard of it. So yeah. Back before, I think the Balkan War, no two countries that both had a McDonald's engaged in armed conflict against one another. That's great. After the point that both of them had the McDonald's until the Balkans.

Because they were pretty stoked about their fries and their Big Macs. You could say that. You could also say that correlation does not prove causation, but still it's pretty interesting. And it makes a good point that it's a symbol actually more than anything. It is. Just like a Coke machine. Like you can find Coke machines in the most remote countries, areas of the world. And you can say that that's basically you're exporting democracy through successful capitalism.

Right. Happy juice. What's going on right now that continued export with this thing called microlending? That's the longest setup we've ever done. Yeah. But dude, it was good. Yeah. Microlending is pretty cool.

This is a good article, dude. Thank you. Well done. Thanks a lot, buddy. So Josh, as you know, because you wrote it, microlending doesn't necessarily refer to the size of a loan. It's not necessarily an itty-bitty loan. It's not the size of a loan.

It's how you use it. Right. That's actually very true. Thanks. So, it refers to the qualifications of the borrower, although it usually is a small loan. Right. One of the big flaws in that American dream, that capitalist free market system where supposedly everybody has an equal opportunity at obtaining success through their own hard work, is that

you usually need startup capital, right? Right. Even if you're selling hot dogs on the street, you got to buy the cars, you got to buy the dogs. Like my Bloody Mary stand last year at the golf tournament. I was not there for that. I wasn't invited. I had to, to my front yard, I had to invest in the...

Oh, yeah. That's the one where the cops came and busted it up, right? Sure. I lost all that money that I invested in the Bloody Mary supply. That's what happens when the fuzz turns up. But startup costs, sure. Yeah. The thing is, is where do you go for startup costs to generally go to a bank?

And will banks are run by capitalists themselves? They're looking to turn a buck? Of course. So... As they should. They should let people have to meet to be accepted for a loan application, right? Right. So the problem is, is that there's huge masses of people, generally the working poor are usually

excluded from this. They don't have collateral. Of course not. They might not have an education to back up this entrepreneurial spirit. Probably no credit history or loan history to begin with. So they're not meeting the criteria. They can't get the loan and therefore they can't obtain self-sufficiency through their own hard work.

Or achieve the American dream. It's a flaw. It's a caveat to that system, right? So what microlending does is it kind of fills that gap between these excluded groups and self-sufficiency by loaning the people who, I put it in the article, that traditional lenders would consider are mindlessly risky. These loans are mindlessly risky. Yeah.

That's why a dude like Muhammad Yunus deserved the Nobel Peace Prize. Yeah. Yeah. Yunus is a Bangladeshi economist who founded this microlending institution called the Grameen Bank. Can I read his quote? Yeah. I love it, man.

It's inspiring. He said, if banks went to the rich, I went to the poor, if banks went to men, I went to women. If banks required collateral, my loans were collateral free. Here's your Nobel Prize. He also went to the illiterate by not having too much paperwork. Yeah. Poverty, rural areas.

Rural areas where there were no banks. I mean, think about how little access you have to start up capital. There's no bank anywhere near you, so he sent people out to these villages to sign people up for loans, and he did it pretty aggressively, but aggressively in the favor of these other people rather than aggressively trying to make money himself. So he found Grameen Bank, I think, in the 90s, and it's actually successful. Yeah. I love the business model.

It's so cool. Yeah. I think what he pointed out about what he counts on to get the loan repaid is almost like honor. It is. In traditional societies, there's a lot at stake with a good name, and when you borrow money, you're putting your good name on the line, which is how you got the money in the first place, usually your family name.

So if you don't repay it, you're basically damaging your whole family's image. Yeah. It doesn't go or so well here, I bet. No. You'll be like, hey, thanks for the money. So long. Yeah. So they use social pressure, traditional social pressures that are already in place

to ensure loan repayment. Which happens on a weekly basis. Is that correct? Yeah. People make weekly repayments because it's usually much more affordable. And the bankers on bikes, I love that. These guys ride around on bicycles and visit them, and they give them their little payment for that week.

Yeah. They're collection agents, and they'll have maybe several in each village or whatever. So these people are also these people's neighbors. Right. But they're not like threatening collection agents. Not necessarily. I don't think with Grameen Bank it's very threatening. Right.

But yeah, so imagine a guy who's a collection agent that's also your neighbor who works for a lending institution that you borrow from showing up at your front door every week in a society where your good name's on the line, you're going to make those repayments. And it's successful actually. Not just Grameen Bank, but across the board with micro lending in general, they have a 87% rate of repayment, which beats traditional banks. It's proof that it works. It is proof that it works.

Right. At least 97% of the time. So let's talk about how it works. Grameen Bank and other micro lending institutions aren't running around and just grabbing Pedro and Shoshana off the street. Those are just two names I came up with. I could tell you were flailing about searching. They don't grab them and say, hey, here's some money.

Take some money. Right. So they'll actually have to have business plans or at least ideas of what they're going to use the money for. These are entrepreneurs without an opportunity basically. And so what it is is they're funding people in developing countries, which as I said before is kind of an extension of the entrepreneurial spirit that the U.S. has founded on and it's happening overseas now, right?

Spreading a little bit of that capitalist love worldwide, which is love, love. So Chuck, like I said, let's talk about how it works. If you wanted to go and make a loan, how would you do this? Would you go to Grameen Bank, fly to Bangladesh? Go here's some money. Give this to this person. You'd need to get a loan to get the plane ticket though. Right, yeah.

No, you would go online is one way to do it. And I like the model used that while there's two ways, there's the not-for-profit model in the profit model. But should we talk about Kiva.com first? Yeah. That's a good one. That's the not-for-profit model, correct? Right.

So basically you will present your business plan as an applicant from places like Lebanon, Tajikistan, Mali. All over the place. All over the place. Nicaragua has a lot of people on there. Yeah, Nicaragua. And then there's users on the other end that sign up and actually contribute toward this loan in good faith that you have a 97% chance of getting your money back with no profit attached.

But it's a good will gesture and basically people contribute as little as $25 until that loan amount is full. So it'll be like somebody's picture and then the name of their business and then what their business does. It's almost like adopting a person in a foreign country. Very much like that actually. And you're kind of adopting their business temporarily, right? So it'll also have a description of what they plan on using that specific loan for, right?

So it'll be like maybe purchasing timber for resail or purchasing agricultural supplies like seed or whatever. And it has like a little bar and it has the loan amount, the total, what they need at the end and then it'll fill up as people contribute. So a lot of different people can contribute to a single loan and it reaches 100%. And in a lot of cases, a site like Kiva will use a third party lending institution like maybe Gromim Bank and Bangladesh, but a local community bank usually actually issues a loan, right?

Yeah, you can't just send them a check because they wouldn't have anything to do. No, sometimes they do. Some sites actually do issue these loans themselves. But for the most part, they serve as a intermediary between a URI who's contributing our money and... Which of course we don't do. Which we could though. And actually the cool thing about Kiva is that you can contribute as little as 25 bucks.

Yeah, I'm going to sign up for this. And also check they have gift certificates too. So the cool thing about the gift certificate is like, let's say you give a gift certificate to me. And what you've done is you've made it, you better do this. You've contributed 25 bucks basically in my name to this whoever's business in Nicaragua. And I get the 25 bucks back. Oh, really?

Did I write it off? The distinction... I don't think so. Okay. If you do, you're a cheap bastard. The distinction is that you don't get any extra money back. Well, no, there's no interest return on your investment. No, there isn't.

But these people are paying interest. The average interest on a micro loan worldwide is about 31%. Does that just keep the whole thing afloat? Is that what they use that money for? Supposedly. We'll get to that in a second. Okay. So that's the narcissism of micro lending.

Yeah, I saw that. Believe it or not. So that's the not-for-profit one. It's really just a socially responsible investment where you can usually expect to get your full amount back but not any interest. Then there's the for-profit model, right? Yes, like microplace.com. That's on par with Kiva's.

Those are the two big micro lending sites. And this isn't a bad thing because people are trying to make a profit either. It still works out great. They get their money and you can get a yield as high as 5%. Which I was reading an article and some guy was saying, compare that to CDs. I know. You get a CD that's giving you 3% interest. You got a great CD right there.

And a CD doesn't give some poor Bangladeshi a leg up for his petty-cap business. Although there are, if you have 401K and you start looking around, more and more investment banks are creating mutual funds that loan to micro lenders, like Grameen Bank, that kind of thing. I have a personal story about this, actually. I want to hear it, buddy. You didn't know this, did you? No.

I worked on a, I did a voiceover for a friend's documentary he did about the tsunami survivors. And he works for a non-profit agency, like missionary work type thing. And I did the narration for it. And one of his, one of the guys, he focused on like four different stories. One of his stories was a guy who had a petty-cap, you know, the little bicycle cabs. And he got a micro loan. I don't remember who it was from after the tsunami to buy a second and third petty-cap. And then the money he got from that, he opened a little store, like a little small hut store.

But the dude was able to build a house and like restart his family. He's lost his whole family. He met another woman and they ended up having kids. Cool. Just like the coolest story. That is a great story. And I don't think he had to borrow more than like a hundred bucks or something, man. Well, that's a point, actually, that the 25 bucks, I think in the article, I compared

it to the Peruvian Soleil. So 25 bucks on August 10th, 2009, when I wrote this article, the exchange rate was I think 25 US dollars to 73 Peruvian Soleils, right? So I mean, if you, if somebody gets a thousand dollar loan, that's almost three grand in Soleil, which that's a ton of cash. You can buy a lot of timber. Yeah. And petty-cabs.

I have a personal story about micro lending. Really? I borrowed some money from my dad once and I still have an outstanding balance. Is that why your leg is broken? Yeah. Well, my thumb. And that's funny. You should bring that up, my friend.

Lone shark. That was a great setup. Yeah. You may notice that this is actually, it bears a striking resemblance to loan sharking, which still exists in a lot of countries. And actually, I read that micro lenders are starting to give loan sharks a run for their money because there is no attendant threat of violence. Driving amount of business.

And their interest rates are much, much lower. Yeah. What is it? I looked it up, actually. I couldn't find what a loan shark rate might be. Oh, often like a thousand percent, three hundred percent. Are you serious? Yeah.

Just astronomical amounts. It's unreal. Yeah. And you will have your legs broken. Yeah. Yeah. They don't, you know, Muhammad Yunus, he won the Nobel Peace Prize. He's not really into leg breaking, I don't think.

Not anymore. Yeah. And you can tell, look at him. Did you see him in the article? He's got his little Nehru jacket on. And he just looks like, you can trust me, I helped the poor. Here's $25. Go build a business.

Yeah. Yeah, that little amount that you contribute really has a huge effect in the developing world, right? Right. So that's pretty much the nuts and bolts of how it works. Like I said, there's mutual funds. Right. They back these?

Right. And supposedly, it actually does have an impact. A lot of people, as we were saying, that export of capitalism of the American dream. Yeah. I like the tie you made there, or that other people have made that you highlighted. Well, there's a theory that globalization prevents war. Yeah. That hasn't been fully panned out yet.

A lot of people thought that the interdependent economies of the 1920s and 30s would prevent war, and we still had World War II. So that kind of undermined that. I personally think that we just weren't at the stage of globalization yet, that we are now. Right. So globalization can prevent war, just because money trumps ideology any day, especially if you are in such a position of power, that you are commanding armies or economies or

nations or whatever, you're probably going to go with your economy over ideology, right? I got another quote from your own article. Let's see if we can hear it. Well, this kind of backs that. This is what the Nobel Committee said when they awarded Eunice the Prize in 06. Being peace cannot be achieved unless large population groups find ways in which to break out of poverty. And dude, that's pretty succinct.

Yeah. A lot of people were surprised when Eunice won the Nobel Prize. Yeah. But how can you break out of poverty is by getting a microline starting your business. There's another theory that terrorism is bred by poverty rather than religious ideology or dogma. I could be down with that. So yeah.

Makes sense. You go, whoa, whoa, whoa. Let's stop this jihad, and maybe we can explore some business opportunities instead. Mike, wouldn't you rather open up a jihad stand? Then blow yourself up in the middle of that market? Right. Yeah. And if you have a stand in that market, you're not going to want suicide bombers.

They're bad for business. Yeah. Sure. Well, a lot of people say there's not a lot of evidence though, right? On the other side of the coin? Yeah. There's a Yale economist I quote in this saying that we are utterly devoid of evidence. Right.

And there's some studies that have shown that it doesn't necessarily help. These people may repay it, but there's no follow-through on them actually using the loan for what they say they're going to. Right. Right. I mean, if you suddenly have 3,000 soul-a's. You blow it on ****. **** and ****.

Yeah. You could easily do that, or you could pay rent or something like that. Things come up. Sure. I mean, have you spent that was marked for something more important, but you had to deal with something that was an emergency that came up, right? Or if, you know, someone knows, if your neighbor knows you got a loan and you get robbed or something, I'm sure other things happen.

And apparently microlending is still young enough that it requires injections of capital, like these lending institutions themselves to stay afloat. They themselves aren't self-sufficient, which you have to have that self-sufficiency to help other people become self-sufficient. I think the jury is very much still out and just the, theoretically, it's such a noble idea that I can't imagine it won't be given more and more slack or whatever it needs to continue to grow. Sure.

And at a 97% rate, I mean, you can't argue with that. No. And that 97% rate though has actually led to some really despicable plots. Oh yeah. The Mexican banks. Yeah. Well, Grameen Bank has actually pointed out that this vastly overlooked segment of the population are dependable to repay loans.

Right. So as a result, some banks have come up to create, to issue microloans, but not to help poverty, but to make money. Right. Specifically, lent to the poor though still. Yeah. There's a guy in Mexico who owns the, they were kind of like the Walmart of Mexico. Um, and I can't remember his name, but he's this multi-billionaire business guy.

And he said that his father taught him, if you want to make money, sell to the poor. Right. Mainly because there's so many of them. Right. Right. So, uh, he started his business and made a bunch of money selling to the poor, selling, you know, cheap consumer products through his retail stores. Well, he founded a bank.

Very much like Walmart. He founded a bank called Banco as Teca. Right. That's one of two, right? That does this. They are a microlending institution that this guy owns, and they issue these small loans to the poor, the working poor, um, but at really astronomical interest rates. Yeah.

They drive them further into debt instead of, uh, pulling them out of the mire in the muck. Right. And they're still issuing these loans in these traditional societies that have these social pressures. They also use a lot of, um, microlending practices like bankers on bicycles. Right. You guys are the ones who come into your house and write down the serial numbers on all of

your stuff. Right. And so we'll repossess this. And they do. Right. Um, and it's just, it's a perversion of microlending. Right. It's exploitation.

Exploitation. Yeah. Yeah. At APRs up to a hundred percent, you said? Or more than a hundred percent? More than a hundred percent sometimes. So, if you borrow a thousand dollars, you pay back two thousand dollars. Plus.

The problem is, um, Banco as Teca specifically lobbied the Mexican government to be exempt from having, from a law that forces lenders to state the terms of their loan, including the interest rate on a loan, right? On the loan before they issue it. Right. So a person goes up and goes, I want a thousand dollars that the, the, uh, bank issues it and the person walks away with their thousand dollars with no idea how much they actually owe.

Right. Legally, they don't have to do that. Kind of like an arm. And you could make an argument either way, right? Right. And it's not just Mexico. For example, with, for those arms that you just mentioned, was it the, the aggressive predatory lenders?

Right, right. Was it the people who were greedy and said, wow, I can afford a six hundred thousand dollar house even though I only make forty thousand dollars a year? And did you read the terms of their loan close enough? It's everyone's to blame. Everyone is to blame. But Muhammad Yunus. Right.

But we, I did want to point out, it's not just Mexico, we're not picking on Mexico. This is happening in other places too. It is happening in other places. And there's a lot of companies that, you know, we're familiar with like, um, city group. Yeah. Uh, HSBC Holdings, Zurich Financial, uh, and I guarantee you a lot of the people who run those mutual funds that are heavily invested in these microlending institutions that are for profit and exploitative.

Yep. So I think if you, uh, if, if this has piqued your interest in microlending and you want to go on and maybe contribute a few bucks, do a little extra research to find out exactly what the terms are for the, for repayment of those loans, who they're going to, who they're going through. Right. Yeah. Especially if you're going to do it through a mutual fund or something like that.

Yeah. Yeah. I love it. I'm going to scrape together 25 bucks. You can do that. Yeah. I'll scrape together 50, pay 25 to my father and then give 25 on Kiba. You only owe your dad 25 bucks?

No, but it's something. Oh, gotcha. Yeah. Uh, you can find this article, uh, how microlending works in a whole bunch of, we have some really cool economics articles on the site. Did you know that? We do. Yes, we do.

You wrote a lot of them. I did. Yeah, I did. On money for a while. Um, you can find those by typing in probably economics in the handy search bar, howstuffworks.com, which of course, friends, neighbors, loved ones, leads us to listener mail. So Josh, this listener mail is actually very relevant. I saved it for this episode.

Our buddy, Stefan, who sent us our signs folks, we have people that are actually sending us things now. It's awesome. We've gotten, uh, some beer. We got beer from a micro brewery in, uh, uh, St. Arnold's brewery in Houston. Oh my God. That was good. It was really, really good.

Yeah. And we've gotten some little gifts here and there. And of course fan art is always coming in, but tangible things have been sent to us and we're very grateful for that. I got a Michael Jackson shirt from Ben Ivy that he designed. Really? It was cool. You can show me that.

I'll show it to you. Sure. So, uh, Stefan, uh, I'm going to go ahead and say his name because he wanted me to. Stefan Bram. Uh, is in Newark, Delaware, and he and his wife are a, uh, two person team and opened up their own small business in January, 09 called alliteration, A-L-L-E-T-T-E-R-A-T-I-O-N. Nice spelling. Thank you.

You've forgotten to finish it with alliteration. Alliteration. And he, uh, he sent us these signs to go in our studio, uh, has our studio name and underneath one of them it says where Twinkies are revered and moonshine is respected, which we thought was great. Yeah. Anything his daughter helped him come up with that. Yeah.

And then the other one says, uh, where bad ass knowledge happens. Yeah. And where we've got both of these hung up in our studio and they look awesome. And we just wanted to thank Stefan and say good luck with your business. Yeah. Big thanks Stefan and his daughter. And his wife. It means a lot to us.

And, um, he, uh, he said that they, he also wanted us to mention, if we could, that they try to use, uh, recycled, um, recycled wood and stuff to make it a more green business. And these signs were actually taken from like a children's bed or something like that. Poor kids. I know. Now his daughter's in the floor. I know. So I can hook Josh and Chucker.

If you want to, uh, support Stefan, he says his website isn't completely finished. Um, you can go to alliteration.etsy.com or email him at info at alliteration.com. It's two L's, two T's and, uh, Steph is a great guy and we wish him all the luck in the world. Yeah. Quality business. And you can send this up for me to say this, if you want to send me and Chuck some cool stuff, you can get our information by sending us an email or you can just say hi, unicorns,

torpedo, whatever, or go to the website and click on the contact button at the bottom and it has the address and you can just send it straight to us. Yeah. But we won't hear from them then. I can include a written note, a handwritten note. Okay. And a glossy photo. You know, well then I have to, I still have to give the email here, Chuck.

All right. Whatever. You can hire whatever to send an email to stuff podcast at howstuffworks.com. For more on this and thousands of other topics, visit howstuffworks.com. Want more how stuff works? Check out our blogs on the howstuffworks.com homepage. Brought to you by the reinvented 2012 Camry. It's ready.

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