August 24, 2007

Prosperity Gospel, Part II

If someone expresses interest in investing in Guanajuato, we don't let them get away.

--Vicente Fox

GIVEN ALL THE business and finance writing I have been doing over the past few months, I daresay Loyal Rant Readers could be forgiven if they thought I had become -- well, a bit calculating in my outlook on life. Indeed, were one to say my writing on these topics has been a bit cold, unforgiving and ruthless, I don't think I would disagree.

However, when dealing with financial matters, I don't think these traits are all that bad to possess. Since these transactions necessarily involve working with strangers, one ought not reward incompetence, forgive stupidity or allow oneself to be taken advantage of just because one wants to be nice or avoid confrontation.

After all, no one cares more than you about your own money, and unless you operate along those lines you are inviting trouble. So if that means questioning the fees paid to the managers of your retirement funds, or criticizing the rationale of an investment strategy, or witholding your proxy vote for a clueless company director, or not buying the tru-coat at the used car lot, then those are the things you have to do. It's far better to be conscientious of these things than to be taken for a chump.

But the wonderful thing about capitalism is that, even as one must deal with the back-and-forth of the markets and the minefields of business, there are so many opportunities to help one's fellow man. Our system lends itself to coming up with new and creative ways to help those less fortunate, whether it's through one's own investing decisions or through one's charitable endeavors. Increasingly, it's possible to combine those two seemingly unrelated objectives and offer a dignified helping hand to those who need it.

Perhaps one of the most inventive combinations out there is Kiva, a Web site that allows people to offer no-interest loans to small businesspeople in the developing world. Since people are offering loans and not grants, it is not really charity, but at the same time, providing these small firms with working capital is very much doing good. Back in May, I wrote about the small investment I had made in the site and why I was happy to do so -- because the approach treats borrowers with dignity and as equals, not as charity cases.

At the time, I invested a total of $50 into my loan pool and made two $25 loans to two small businesses in Mexico, whose owners are widows working to raise their families. This investment worked out to 2.7 pc of a $925 loan made to a shoeseller in Monterrey, and 2.5 pc of a $1,000 loan to a small grocery in Cd. Acuña.

Four months later, I am pleased to report my borrowers have repaid me a total of $18.37 and are well on their way to repaying the loans in full. While God knows things happen in business, it sure looks like my borrowers are going to repay me on time. This is, if I may say so, pretty bloody cool. The opportunity cost to me was practically nothing* and I've helped them accomplish their goals. And when the loans are eventually repaid, I could cash out and get my money back -- but you know, I don't really want to do that. I'd rather plow the money back into new loans and keep the virtuous cycle going.

But I am certainly not the only one getting repaid. According to Kiva, the two microfinance groups that handle the loans in Mexico have turned in downright stellar performances. In total, they have loaned out more than $1 million over the past year or so. NOT ONE loan has gone into default. NOT ONE loan has even been delinquent. This is downright amazing when you consider more than 1,700 loans have been made. With that amount of activity, it would be reasonable to expect a default rate of 1 to 2 pc and a delinquency rate a bit higher, but EVERYONE has been paying back and paying back on time. Even if I wanted to find fault, I couldn't do it.

But what I really like about Kiva's approach is that it creates wealth without any of the distorting economic effects one often sees with well-intentioned relief efforts. Plus, I would like to think that eventually, that wealth creation -- through increasing trade and other economic activity -- will help folks here in the United States. If that grocery in Acuña does well enough, its owner may well be shopping over in Del Rio before we know it.

And that's enough to warm even my cold, calculating heart.

* Arguably, the opportunity cost of making the loans is the measly amount of interest I would have earned had I put the $50 into a stingy U.S.-based savings account. That works out to like 17 cents. These days, you can't even buy penny candy with 17 cents.

Posted by Benjamin Kepple at August 24, 2007 12:45 AM | TrackBack
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