Pros and cons of microlending (like Kiva)

I'm interested in learning more about the benefits and drawbacks of microlending. I've poked around a little bit to see what I can find about it but am not sure what to believe.

I initially donated at Kiva maybe 5 years ago. The "Atheists, Agnostics, Skeptics, Freethinkers, Secular Humanists and the Non-Religious" group there started in 2008 and has been the biggest single group for years (probably because the theists who choose to affiliate do so with a more specific, smaller group).
http://www.kiva.org/
http://www.kiva.org/team/atheists

I've loaned $25 to 68 people in developing countries over those 5 years from the initial donation I made; the money just keeps coming back into my account for lending to another applicant, over and over. (My seed money was more than $25; I do give a little out of my pot periodically to Kiva for their operational expenses, so my pot is dwindling a bit, but still large enough to have several loans out at once.)

I don't know the average loan amount, but $250 is a common low end, and some go a bit over $1000. I tend to loan to people whose loans are almost fully funded (in $25 aliquots from many Kiva members, summed), so as to push the borrower into the "funded" category so they can start getting & using the money. It's possible that strategy then leads to my loans being repaid sooner than if I donated to borrowers I selected on some other criteria.

In that time, none of the borrowers I've loaned to has defaulted (based on stats Kiva has in my account). Zero. That seems low, to me.

So, anyway, I read that microlending/microfinance helps people and families out of poverty (or into less extreme poverty).

But I also read that borrowers (in general, not specifically of Kiva) are sometimes coerced into repaying before they can afford to do so.

And I wonder, as I read the short profiles of borrowers listed at Kiva, how often that person is already the most wealthy person in town, how often he or she already has a monopoly on some goods or services the townspeople need, or at least is already one of the people best able to access resources. Could well-meaning lenders be exacerbating disparity? Are there people in the same communities who could benefit more from a loan - for whom a similar or even a smaller loan might make a bigger difference in their ability to eke out a living, feed their family, etc?

Opinions welcomed, and also any information you might have about the pros & cons of microlending. Thanks!

*bookmarking* (i'm really interested in this idea too, but initial investigations into it had me a bit shocked at the interest rates that were being charged).

Expanding on my question above of "doesn't it just increase disparity (in the community in which the loan is given)" - I don't see how it can't, unless (a) the loan increases wealth in that community (even after the actual $$ has been paid back), or (b) the loan allows for trade outside the community, so that fund start flowing into the community anew (in which case that wealth is being redistributed from the larger community, the region or the country or the world).

So, for (a), an example would be a shopkeeper seeking a loan to buy more goods to resell. (That's a pretty common reason for a loan.) So, making up the numbers, say a shopkeeper gets $500, buys more food or clothes or whatnot, resells them for $600 to his/her customers (presumably mostly people in his/her town), pays back $550 for the loan + interest, and keeps $50 in profit. But that means the other townspeople paid 6/5 as much as if they somehow been able to band together to get the same goods (without paying any middleman. which may not be realistic).

Some of the other enterprises have more opportunity to actually create wealth (as I understand it), by getting resources from the natural world (raising crops or animals, for example, or chopping & selling wood but that raises its environmental issues). Craftwork is in one sense adding value but I'm at a loss as to how that actually creates wealth overall to (for example) turn yarn into a wall hanging or even into clothing that's more decorative than would have otherwise been made.

Which is something that's confused me for years: what exactly is wealth, such that it can be increased without just redistributing it from someone else? Seems to me that only possibility is from harvesting & use of of natural resources, where one expends effort to obtain it and - very importantly - turn it into something functional for many people (esp infrastructure, like buildings and bridges). Otherwise, all I see is money/wealth/value being moved from one hand to another. If someone digs up a diamond & sells it for thousands of dollars, are people actually better off? Maybe the one who had money to spare is pleased to have the diamond and the one who had access to the diamond mine is pleased to have cash that can be used to purchase something else, but is there actually anything of greater value in the world?

Which is something that's confused me for years: what exactly is wealth, such that it can be increased without just redistributing it from someone else? Seems to me that only possibility is from harvesting & use of of natural resources, where one expends effort to obtain it and - very importantly - turn it into something functional for many people (esp infrastructure, like buildings and bridges). Otherwise, all I see is money/wealth/value being moved from one hand to another.

DISCLAIMER: I'm not an economist, question posed here just got me thinking. If most of it makes you feel "duh", don't worry. I'm just clearing my own thoughts on the subject here.


I think you're right here, but maybe downplaying the part of knowledge, labour and even trade plays in the accumulation of wealth. I think it's enough, why should there be some other mechanism for increasing wealth?

With knowledge and labour we can turn copper ore into copper pipes. And having knowledge, we can build machines to do most of the work for us, both mining the ore, manufacturing the pipes, and also setting them up as a water distribution system, powered not by human labour, but by engines. Knowledge can also increase our pool of resources, in this case unclean or sea-water, can be made safe for consumption by putting knowledge into use.

Labour is also cumulative, roads and bridges, water distribution systems all are, hopefully, there for the next generation as well, with only maintenance needing to be done. This all goes to increasing wealth. Also, "resources" includes, not just natural resources, but also the services we create by labour.

Money in this equation, is the oil in the machine. It helps to make trade easier and thus allows increased wealth by enabling trade of goods, that are not conducive to wealth for the individual, to be traded for something useful. It also allows for specialization and more efficient use of labour.

Credit can, also, increase wealth - and of course you know that, why would you be giving out loans otherwise? (though, I think it can also decrease it even while increasing the pool of money, by allowing labour and resources to be directed at something that doesn't produce utility), anyways, let's look at the shopkeeper in the example.

Without loan she might be able to only supply 10 goods to the people needing them (presumably the buyers find the goods he's selling valuable, why would they be willing to shelf out their hard-earned cash otherwise). It might be that profit from 10 goods doesn't offset the costs she's facing, keeping the shop, investing her time etc. So she can either increase profit margin (might or might not work, but the villagers are losing either way) or she can take out a loan and leverage the deal. With the loan she's now able to buy 100 goods and sell them at the same profit margin or even at a lower margin (as one might expect since the supply is now larger) and still make enough to support herself.

When it comes to the concerns you have about Kiva, there's some fear of monopoly, but the solution, in my opinion, isn't to stop giving out loans, but to give out even more loans so that's there's credit available in the market for competition as well.