As you can tell by the crazy stories and wild tangents in class this week, I love finance. This week's class was all about how firms get access to capital. I think what I like most about finance is that, at its heart, it is about telling a story-- the story about how you and your firm add value to the market. How do you provide the most service? Yes, service.
The heart of the matter is that commerce is about service. This is true whether you make burritos, autos or provide professional service. If the market needs it or wants it, there is value. Capitalization merely provides the mechanism to facilitate the exchange of goods and services. The question of whether the markets can always sustain a livable and fair wage is somewhat of a different matter, however. Capitalism is great, but not perfect.
In class we discussed bootstrapping, seed money, venture capital, public and private equity offerings, private equity, and debt financing. As you know, these are all strategies used in developed economies. But what about the facilitation of commerce in the rest of the world?
In class we discussed Kiva (http://www.kiva.org ). The lead video on this posting reviews the concepts that we discussed. However, I urge you to think a little deeper. Watch this video, and tell me what you think:
MSBA511 - Applied Financial Management, exploring our vocations in business with a vision of service to God and community.
Think a little deeper. The name of this blog post is "We all are looking for access to capital." This is true. We are searching for jobs whether small or large. Every single person needs access to capital in order to live. Unless you're a hobbit in Lord of the Rings, you need money. But hey, even those little guys were searching for a ring.
ReplyDeleteSo what's the problem with giving loans to poor? In my opinion, nothing. Of course, financing the poor in the situations described in the video or similar to what Kia does is the best way possible, I'm not saying we need to give $100 to every homeless person on the street. However, through these micro-financing abilities, people have the chance for freedom. How are they free if they are strapped to paying back a debt with a high interest rate?
Well, micro-finance is providing individuals with capital to accomplish their goals. Build a business. Build one's self-esteem. Support one's family. Be one's own boss. That sounds like freedom to me. In the video specifically, micro-financing is empowering women and provide a haven for their confidence to flourish. Beat that Cosmo.
What are the biggest problems with micro-finance? High-interest rates? Competition with other poor, micro-financed individuals? Welcome to America! At least, micro-financing is promoting capitalism and maybe, even making a third world country move up the ladder to second world country. Micro-finance is providing opportunities.
I don't think these situations are a means to an end. Micro-finance, of course, isn't going to eradicate poverty. But what is? At least it is instilling work ethics and a sense of value to those who are accepting these small business loan. If anything, micro-financing is allow these individuals a chance at escaping poverty.
I’m a big supporter of micro-finance. I have does extensive research on Kiva and have made loans through the organization. All of my loans have been fully repaid which reinforces my beliefs in the system. Steph, I love your thoughts about how capital can provide freedom and how in many cases, it can particularly empower women. Women in America think we have it tough (we do!), but compared to women in many developing nations, or countries that practice theocracy, women in America have it all. There is a need for micro-lending to allow for the betterment and equality of women worldwide.
ReplyDeleteAmericans, both men and women, also take for granted how easy it is for us to get a loan or insurance. As an example, many people in our program have student loans and had no issues applying for and being granted one. Bootstrapping, despite its meaning, isn’t so hard because of the multitude of resources available. That isn’t the case in developing countries where people are already bootstrapping to survive.
High interest rates can be a challenge to those seeking micro-credit. Institutions like the IMF, which provide loans to governments, notoriously have high-interest loans, which perpetuate the poverty of many developing countries. Of course, the discussion pertains to micro-lending, but there are similarities between the two. This is one reason Kiva is so effective—No interested is due. Micro-lending, along with initiatives that support alternative forms of income (Pigs for Kids or Heifer International), have been incredibly successful in empowering people to better their livelihoods through meaningful work. Commerce is about service, which is made possible by the services done by micro-lenders.
Touché, Meredith- commerce as service is a fabulous mantra… don’t you wish more businesses would embrace it? I too am a fan and supporter of micro lending. I love that you mentioned similar initiatives that support alternative forms of income; particularly Heifer International. I did a great deal of work with Heifer international in high school. If anyone is interested in learning about Heifer and their approach - helping people obtain a sustainable source of food and income- check them out here. http://www.heifer.org/
ReplyDeleteHere is my deeper thinking about micro financing and institutions… it enables a large number of good paying jobs. This is more often than not likely to result in multiplier effects. This certainly can be up for debate… but often the positive effects of micro financing cannot be (accurately) measured by money.
Although micro-financing in developing countries provides easier access to capital, the high rate of interest for a lot of institutions that were discussed in this video is Usury. Usury, as we all discussed last semester, is unethical. But to look a bit deeper, to use micro-finance as "a means to and end" or a means to get out of poverty, may prove ineffective as the video pointed out. Because the fact is, a lot of the people in these entry-level businesses that utilize micro-financing sometimes fail to make profit or break-even. In this case, it's not really possible to "climb out" of poverty unless they make enough money to invest in stocks that are successful, and receive the dividends from that. So yes, in theory, micro-financing is definitely noble, but there still are a few things it falls short of if people intend its purpose to eliminate poverty. However, if micro-finance is recognized as a way to help people make a living and use it as a PART of the attempt to eradicate poverty as opposed to the sole cure to it, I think it is a great stepping stone toward development.
ReplyDeleteThe self-help women's groups discussed are amazing in theory and I agree with Meredith that in practice, they really are effective in terms of development and service. The reason why these might be so effective is because the interest rates are so much lower than the commercial bank micro-financing discussed early in the video. I like what Mere said about Kiva that there is evidence that the system works for all parties. But the fact is, for orgs like Kiva, the lenders are lending because of service and the promotion of commerce in developing countries, not really for an ROI. If more people made this effort to promote commerce, perhaps developing countries would be able to utilize this more so than the high interest rate MF entities, which would be even more of a step toward eradicating poverty.
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ReplyDeleteI had never heard of Kiva and the opportunities it provides and I am so happy that now I know of it. What a great way to help poor people and poor countries. This is definitely a step in the right direction (other than just giving them enough to make it day-to-day). But, like Stephanie said, it is not the end. The first video above makes it clear as to how education, laws, and such are also important when trying to stimulate small companies. Micro-finance is a great way of service and I'm glad Meredith has had such a good experience with Kiva for that inspires others to try it out. I also like how Amelia pointed out that this intent on helping other countries, instead of the intent for a profit, is going to make a difference in the world.
ReplyDeleteAh….Micro-financing. It sounds great. In a capitalistic society like ours, anyone with a couple of dollars lying around can be talked into making a micro-loan to someone else considering that they will be paid back the principle and a little extra. But why is it that to donate $100 to the poor and needy we as a society need to receive something in return? Is micro-financing the fall of conventional charity? Instead of paying back the “donors” with interest wouldn’t the money be better spent elsewhere in the developing society? Can you even be called a “donor” if you end up receiving more in the end than what you put in? Let’s be honest and tell it as it is. Kiva does not have “donors”, it has “lenders”.
ReplyDeleteWhen third world countries begin to develop themselves economically through borrowing money, the whole world can benefit economically. I think it is sad and immoral tin India to have such a high rate of interest such as 28% and having village lenders asking 5X as much. This is taking advantage of people, even if both parties have entered into a contract legally. It is great that the microfinance in India includes women. Microfinance will enable people to invest. It is sad however, that microfinance is not eliminating poverty as much as I would expect, and, I would be curious as to the reasons why, and how that may be improved.
ReplyDeleteI must agree with Stephanie, that it is great that microfinance is instilling certain human virtues such as work ethic, courage, and perseverance in the hope of escaping poverty and trying to fully actualize oneself. It is allowing the global community to become more one in taking on the responsibility to grow everyone’s potential toward liberty. It is amazing how much many people can take micro finance for granted. It is such a backbone to entrepreneurship and democracy.
Nicole, I have never received interest on my loans paid through Kiva.org. Other micro-lending institutions charge an interest rate, but Kiva does not.
ReplyDeleteI am also a supporter of micro-financing and recently watched a video on the subject for a notebook assignment for our Leadership class. The video was specifically on the Grameen Bank and how it got started. I found it interesting that the majority of the borrowers were women and that the video mentioned that women could only borrow in groups so that they would avoid problems with the men in the society, since a woman having control of money is still deemed taboo in some societies. I really liked that the foundation took into consideration the social/cultural aspects of the society that it was serving. This really proves that it is about serving the people and not just making a profit, as more businesses should do.
ReplyDeleteReflecting on this video, and the subsequent posts, reminds me of the current problem the US is experiencing with Initial Public Offering market and how its decline is indicative of a greater problem involving the “bootstrap” and entrepreneurial spirit in America.
ReplyDeleteAmazingly, the traditional IPO model (the small start-up) faces even more obstacles today than it did almost a decade ago when we were faced with the post-9/11 economic downturn and the passage of The Sarbanes–Oxley Act of 2002. Consider the recent credit crisis and the financial meltdown of 2008. Investors are far more unlikely to invest in a start-up and are instead more likely instead to invest in a safe, mature businesses (if any).
To illustrate my point, here are some examples: in a recent story published in the Minnesota Star Tribune titled "State’s venture capital investment dives to new low," columnist Wendy Lee points out that “Venture capital investment in Minnesota companies plummeted 48 percent to $139.5 million in 2010, according to a report that comes out Friday. Minnesota ranked 19th on average in quarterly tallies of venture capital investment last year, Hare said. That compared with ninth in 2007.”
It is no better in the South. Take for example the state of Georgia where it “produced $69.95 million in venture capital, drawn from 13 deals for the first quarter of b 2011, a big drop from first-quarter of 2010, when [Georgia] posted $118.55 million garnered from 16 deals. Georgia also sagged from the fourth quarter of 2010, when 13 deals brought in $102.51 million.”
Perhaps the outlook is better in the West.
Colorado “plunged from 27 deals and $256.20 million in the fourth quarter to 15 deals and 63.13 million in first quarter 2011.”
Nope.
(On a side note, it is important to understand that new business start-ups are an important factor in determining and sustaining the long-term economic growth of our economy. This cannot be stressed enough. Businesses and their owners generate jobs and wealth, not the government. Although the government can help to foster new business development, it generally can do very little to provide the capital and initial support necessary for the start-up phase).
Factors that have led to this steady decline include detrimental and expensive SEC regulations, Sarbox, and 2008 recession. Don’t forget the House of Representatives also deciding to pass HR 4213 which contains “a provision to change the taxation of carried interest from capital gains to 75 percent ordinary income and 25 percent capital gains.“
Surely, someone in the House understands that there needs to be a meaningful tax incentive for long-term investment in start-up companies. How can business owners be profitable if they have to pay to keep the SEC happy while simultaneously paying taxes?
As an obvious result of this perfect storm, entrepreneurs have been scared away from expansion and the solution is not immediately clear. There are the old fashion virtues of stoicism and stick-to-it-ness. However, that may not even start to come close to what is necessary for success.
Ultimately, it comes down to risk (which, unfortunately, is still considered a dirty word among investors). Entrepreneurs and venture capitalists will simply have to decide whether they would rather coast on safe but low-yielding investments or whether they are willing to gamble on a prospect that might flop. Are they willing to hazard a company that has an established and steady brand but also a large amount of debt or would they prefer to play small-ball? As long as the bootstrap mentality is alive and as long as investors are willing to take risks, the IPO market will remain active. However, what would really assist the IPO market, what would really breathe some life into it, would be the easing of Federal regulations while at the same time providing tax-break incentives. Give the investors a reason to risk their capital. Give them room to grow and they will produce and provide.
Micro-lending is alright in my book! It sort of bridges that gap between what many would describe as the hard-line approach and culture of finance (just think of the stigma of loans to governments an such) and the importance of integrity and putting finance to good social use. This reminds of me of a program I learned about last year in one of my courses - one laptop per child in many of these developing countries. The bedrock principle in both giving poor children laptops and providing microloans to these impoverished nations is the investment of self-determination and the opportunity for financial freedom (as Steph mentioned). If we provide these peoples with the opportunity to better themselves in a business sense, then the chances increase of defeating that poverty that plagues them. After all, as we have learned throughout the year, the purpose of business falls heavily in providing a useful service or product to others. What better way to help yourself than to help others. People should be given the opportunity to both help themselves and people in their immediate community - the whole thing just makes a lot of sense.
ReplyDeleteOf course there is criticism, and many of it is justified. The risks are there, and given the circumstances of the people, a high risk at that. There are plenty of things that fall out of our control that may exacerbate the poverty problem, further making it a bad investment. But faith in the purpose and the underlying principle of 'teach a man to fish" outweighs those risks. After all, part of being an entrepreneur or business person is taking risks, and the reward associated with microlending is incredible. KIVA seems like an excellent organization, whose purpose is inspiring.