Ethical Microloans: Big Help on a Small Budget

Microloans can be an ethical way to lend money. It’s hard to think of loans as ethical due to the recent scandal of extortionate interest rates on so-called payday loans (as well as PPI mis-sold on repayment plans, of course). However, microloans offer a valuable and much needed service.

If you feel you were mis-sold PPI as part of an unethical loan then you may be entitled to a claim. You can find out if you qualify for a claim here.

Meanwhile, if you’re looking for an ethical loan, microloans may be the answer. We look at how they work and how you can get involved.

What is a microloan?

A microloan is exactly what it sounds like – a small loan. This is often short-term and loaned to an entrepreneur who is either living in a developing country or will struggle to get traditional finance due to other factors, such as gender, race or income level.

Who offers microloans?

The UK’s MicroLoan Foundation was founded in the late 1990s. This is a charity that gives small business loans to women in Malawi and Zambia in Southern Africa. MicroLoan Foundation now also operates in the US and Australia, with its international organisations also focussed on supporting female African entrepreneurs.

These are two examples of large organisations but the industry is expanding, allowing anyone to get involved. Organisations such as LendWithCare.org and Kiva mean anyone can be a microloan lender – including yourself! These work similar to a crowdfunding model but instead of donating, you are lending.

How do microloans work?

Microloans work on the same principle as standard loans – the borrower takes an amount of money and agrees to pay this back over a set amount of time. Although the loans help those who cannot get traditional finance, this is still a loan and not a charity donation.

And with loans, come interest rates. For some people, this may cloud their view of microloan lenders as ethical. However, The MicroLoan Foundation has defended the microfinance industry’s decision to charge interest, explaining:

“The microfinance sector is broadly united in believing that charging market-related interest rates is not only appropriate, it is essential in most circumstances. Organisations that offer loans at below market rates risk destabilising the sector in the country where they work with an unsustainable business model”.

Although microloans are sometimes defined as “low interest”, this is not always correct. In fact, the interest rates are often higher than usual. The idea of ‘high interest’ and ‘ethical’ together will sound alarm bells for many. However, The MicroLoan Foundation explains that this is due to it costing more to administer small loans, inflation and bank rates often being high in developing countries and both the cost and risk of serving microfinance clients being higher than conventional lending.

However, despite The MicroLoan Foundation’s position, there are some members of the microfinance industry who disagree. Kiva and its lenders, for instance, do not collect any interest on loans.

Although microloans usually feature interest rates, they are still an ethical option. While payday loan companies take advantage of the vulnerable, microloans seek to empower entrepreneurs by giving them an opportunity that traditional banks refuse. The money given to a small business is not a gift, it’s a loan.

As the Microloan Foundation strapline says, it’s about “Giving a hand up, not a hand out”. Those who borrow will need to pay this back (and probably with interest) but without this service, furthering their businesses would be impossible.

How can you get involved with microloans?

As LendWithCare.org and Kiva work similar to crowdfunding, they need a ‘crowd’. And you can be part of this.

Both organisations let you browse people’s business goals before deciding who to lend money to. The entrepreneurs will have a set goal they want to raise and can collect loans from various people. So, there’s no need to be put off by ambitious goals – you can get involved by lending just a small amount of the total. LendWithCare.org’s minimum is £15, while Kiva’s is $25.

There is an element of risk in the event of a loan being defaulted but you should expect your money to be returned. How long this takes depends on the individual agreement. Both organisations recommend keeping the cycle of help going by reinvesting when you receive your money back, but you can withdraw any time a loan comes to the end.

You can also help support the microloan industry by donating to charitable organisations, such as Microloan Foundation. Although you will not know exactly whose business you help this way, you are helping to fund the charity. Microloan Foundation state that just £40 can help a woman start her own business.

Of course, you can be on the ‘other side’ of a microloan too and receive one. There are a number of companies in the UK who will offer microloans to small businesses and start ups, such as Finance Wales and The North West Fund.

So, whether you’re in need of a loan for your own business or want to support an entrepreneur, the microloan industry may be able to help.

If you’ve had a loan where PPI was mis-sold alongside it then you may be entitled to a claim. Don’t let unethical lenders get the better of you – claim now.