Is a Microloan Any Different from a Payday Loan?

January 12, 2016; Hyperallergic

More and more philanthropy is funded by crowdfunding, and more and more sites are in competition for donors’ attention. Most highlight the heartfelt stories and hide the underlying costs and the meager return on investment. Yet once the costs are evaluated, the variations are staggering.

The meaning of Stephanie Rothenberg’s new project at the ZKM Center for Art & Media in Karlsruhe, Germany, “The Garden of Virtual Kinship,” is hidden at first glance. Visitors are captivated by the plants growing and flourishing in individual glass planters. Each seedling waits its turn to be watered, but one can’t help noticing the large amount of water leaking out and missing the thirsty plants. As your eyes follow the leak to the large tank underneath, one realizes just how much water the plants could be getting—if only the leak were repaired.

The project, part of the exhibition GLOBAL: infosphere, examines crowdfunding and microlending costs and return on investment. Each plant represents a campaign in a certain region of the world listed on the crowdfunding site Kiva. As a donor makes a donation, a plant is watered, yet more water leaks into the tank below. The leaking water represents the money that fails to reach the borrower due to high interest and fees charged by the site.

Combined with a second project, “Planthropy,” on view at Manchester’s The Lowry, displaying how social media affects philanthropy, Rothernberg explores, “the intersection between social media, finance, and philanthropy,” Rothenberg told Hyperallergic. “Both pieces are questioning what it means to donate through the click of a button.”

Why are the costs of microfinancing so high? Some of it is the nature of the industry itself and the need for scale. Many microfinance sites research and authenticate the site projects. These activities are cost intensive, particularly in developing rural areas. Costs are also incurred to market and connect the sites to social media, thereby creating a platform donors are drawn to. Other considerations include the method of computing the interest. Overall, these costs add up to a palatable percentage on a $10,000 loan, but for a $550 or $1000 loan, these same costs take up a much higher percentage.

Many donors are drawn to the stories and fail to examine the costs of investing and the meager returns. The microfinance sites highlight the opportunity to use the funds more than once as the initial loans are repaid, but once fees are tacked on, the amount that can be reloaned is minimal. Further, donors are often unaware of the lackluster rate of return because many sites hide the costs and charges. Some studies even suggest that the high interest rates and fees have similar effects on borrowers as payday loans do in the United States.

Rothenberg appeals to donors to research these sites before investing and ask the hard questions: Does the return justify the donation? What is the loan’s cost to the borrower? What is the method of calculating interest payments? (She’d also like them to share their findings on social media.)

But microloan sites charging high interest rates and fees are not the only models. Another option is to support institutions that create tools to help people in developing countries save. Often, group savings can fuel similar opportunities without the high fees and interest rates. Further, since little money is actually rechanneled, donors might consider donating instead of lending. Websites like GivingGrid only charge credit card fees and ask donors to make a second donation to the site to cover its fees and mission. Another site, Benevolent, is a nonprofit raising donations from foundations and individuals to cover its costs. Benevolent partners with other nonprofits to validate the client’s need, and since the donation is channeled through the nonprofit, donors can deduct their donation from their taxes.

As donors research and invest in sites with lower costs and fees, competition will work to decrease fees and increase return on investments.—Gayle Nelson