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Connected Capital: Leveraging the Web to Propel Large-Scale, Micro Impact Investments

| Thursday October 7th, 2010 | 2 Comments

Reporting from SoCap 2010:

Convincing one wealthy donor to invest $50M to provide education loans to underserved individuals seems like a daunting task.  But what about convincing 1 million people to invest just $50 each?  Could you convince the millions of people that make charitable donations every year to instead make a loan to a person for whom more education could generate a threefold increase in income?  This is the premise that Kushal Chakrabarti started with when he founded Vittana three years ago.  The company created the first student loan model in developing countries through an online platform where people provide education microcredits to individuals in impoverished areas.

The biggest obstacle, says Chakrabarti, was that without a proven track record, there would be no investment.  But without an initial investment, there could be no proven track record.  By providing individuals who were willing to take a leap of faith with a platform to make the investment, Vittana is creating the track record for the space and demonstrating that the education their lenders provide generates a 282% increase in income for it borrowers who in turn have a 97% repayment rate.

Online microcredit is a recent phenomenon but quickly growing one.  During his keynote at SoCap 2010, Matt Flannery of Kiva described the online microcredit model as “connected capital.”  This is capital that is patient in that lenders don’t seek immediate returns (if they seek returns at all); democratic in that capital is coming from thousands of individuals around the world; catalytic in that it generates immediate and demonstrable results; and accountable due to the information provided back to the lenders.  Kiva started out as a way to give individuals in developed countries an easy way to invest in entrepreneurs in the developing world.  The idea was to build on traditional philanthropic models like mass mailing campaigns and re-create these online to create a mass of micro-investments.  What Kiva found is that its investors are far more willing to invest in riskier opportunities than wealthy donors who might be tapped for the $50 million investment.  In addition, the lenders are surprisingly high maintenance: they want real time updates on their borrowers and transparent reporting on the impact their money has made.  The web has made connected capital a possibility.

With models like Vittana and Kiva demonstrating the impact and scaleability of this kind of model, the question now is what happens next?  Kiva is seeing an increased number of lenders in the developing world lending to individuals in their own countries or even in developed countries.  This phenomenon is changing the traditional lender/borrower and north/south dynamic that has existed for so many years.  In addition, there is a huge amount of virtual money moving on the web and companies, including Kiva, are now trying to figure out how to turn that into real money.  For example, online game developer Zynga has set up various online donations models where Farmville users can contribute to the rebuilding efforts in Haiti.  Flannery wonders if the millions of Farmville players could use the the virtual dollars they pay to plant crops in the online world to instead help a farmer in rural Africa plant crops in the physical world.

Vale is a second year MBA student at Duke University’s Fuqua School of Business and is interested in how for-profit businesses are finding innovative ways to create social and environmental value and how capital is being driven towards those businesses. Prior to enrolling at Fuqua she was the Deputy Director at Empowerment Group, a non-profit microenterprise development organization based in Philadelphia. This summer she interned with B Lab, auditing certified B corporations and working on the organization’s policy and capital markets initiatives. Vale has a BA in Economics and Political Science from Swarthmore College.


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  • http://people-centered.net/Capitalism.aspx Jeff Mowatt

    Hi Vale, Connected Capitalism is a term used by former Coca-Cola CEO Neville Isdell, as you’ll see from my link.

    In the white paper for people-centered economic development we describe how a new form of capitalism propelled by a profit for purpose business model may be replicated locally on a global basis by means of the web.

    Jeff Mowatt

  • http://www.wokai.org Brendan Rigby

    Hi Vale,

    Sorry for this unorthodox approach, but I wanted to get in touch with you. My name is Brendan Rigby, and I am a volunteer representative of Wokai, a microfinance organisation dedicated to poverty alleviation in and thought you might be interested in what Wokai is doing in microfinance in China. We are currently raising awareness of poverty, microfinance and banking regulation in China and are contacting bloggers and writers in an effort of community outreach. Microfinance in China is an extremely underdeveloped and overlooked issue that deserves more attention.

    Indeed, poverty in China is often overlooked and overshadowed. According to World Bank and UN statistics, around 200 million Chinese live on less than US$1.25 a day. China’s financial and banking system makes it difficult for entrepreneurs and small business owners to access loan credit, especially in rural areas where over 700 million of China’s population lives, to sustain a livelihood, health care and education for their families. Wokai’s goal is to enable borrowers to access credit and to connect them with contributors from around the world who are passionate about alleviating poverty.

    Wokai achieves this goal through a user-driven microfinance website that connects contributors in the international community with borrowers in China. It is a similar approach to that of Kiva and Vittana, who you profiled in your post. Users choose borrowers to support, watch repayments, and pick who to fund next. Wokai has also built a community of contributors through the website, in which users can access user-rated and user-generated content on China microfinance. Through information and capital exchange, Wokai aims to grow the microfinance sector in China and correspondingly increase opportunities for the poor.

    Since the website launch in November 2008, Wokai has raised over US$374.000 in loan capital, attracted 6,700 contributors, and empowered 491 borrowers. Wokai works closely with two Chinese microfinance institutions (MFI) in Sichuan and Inner Mongolia, achieving a 99.5% on-time repayment rate. By the end of 2011, Wokai is aiming to raise US$1 million in loan captial to expand its partnerships with Chinese MFI. Wokai has been featured in CNN, Time, MSNBC, CNBC, Newsweek, CCTV, Phoenix TV, 三联生活周刊, and Bloomberg.

    Thank you Vale and I look forward to speaking further about microfinance in China and Wokai’s successful approach

    Regards,

    – Brendan Rigby