Microfinance is feel-good. It’s win-win-win for investors without demanding return requirements. It’s low risk. It helps the poor and empowers an escape from subsistence living. Microfinance is finance we can live with, far from Wall Street’s psychotic derivatives and Madoff-styled sociopaths. Microfinance is lending and investing that’s so ideal that it’s almost cutesy. However, it’s also small-scale, and its small scale reduces its potential to change the world quickly. United Prosperity is a new organization that includes all of the charm of a typical microfinance outfit, but also incorporates more serious, higher impact financial strategy. Ladies and gentlemen: the power of the guarantor.
To rehash, a guarantor pledges that a loan will be repaid and puts capital as collateral behind the pledge. If the loan sours, the lender receives the collateral the guarantor put up, and the guarantor loses. If the loan is repaid, so is the guarantor’s money. The key is that with a guarantee, like a cosigner, lenders are willing to lend more money because the risk that they will lose all value upon default is eliminated.
When it comes to microfinance, micro-entrepreneurs normally do not have the capital for collateral. Their lack of capital is what defines their microfinance eligibility in the first place. Microfinance before United Prosperity–the Kiva/ Grameen method–is almost direct lending from contributors to entrepreneurs. Contributors’ money is pooled and funds are lent to entrepreneurs, entrepreneurs pay it back, etc. However United Prosperity puts an insightful twist into the process. United Prosperity does not directly lend contributors’ funds- it leverages it into a higher value instrument: collateral on a loan by a different microfinance organization. Having that collateral encourages lenders to be more generous with their lending, creates larger loans, and results in a higher impact process.
Like many microfinance organizations, United Prosperity allows contributors to choose entrepreneurs to benefit. Contributors band together anonymously through the United Prosperity website to supply the capital for a guarantee. While the profit on this type of thing is minimal, approximately $50 per transaction, numerous small transactions have the potential to result in a decent rate of return, and spreads the risk among the group of people banding together to supply the guarantee.
This Bay Area organization is new, but the ideas driving the model are some of the most exciting to exist in microfinance today [[seems like you’re going to contrast new with old, but then you contrast new with exciting, through the word “but.” Is that your intention?]]. United Prosperity adds a more sophisticated financial dimension to preexisting microfinance models, literally enhancing value and maximizing the impact of microlending. It can be found here, on Twitter and on Facebook. You can make your money do more through their organization.