March 7, 2010

Student Loans as Development Aid

While I am a supporter of the microfinance concept, namely, the access of basic financial services such as loans, savings, money transfer services and microinsurance by underserved populations, I am critical of the application strategies employed by microfinance institutions (MFIs). I am pleased, however, to discuss the workings of an organization that is effectively administering small loans to help students in the developing world achieve a college education or vocational training.

Vittana recognizes that the students benefiting from microloans ordinarily could not receive loans to finance their education from local banks. The Seattle, Washington-based nonprofit organization partners with local microfinance organizations to establish student loan programs—often providing the only access to college loans. Through Vittana’s website, individuals are able to lend $25 and $50 at a time to individual students. Currently, Vittana, which is an Indian word for “seed,” has active partnerships in five countries: Mongolia, Nicaragua, Paraguay, Peru and Vietnam.

I had the opportunity to attend an event organized by SeaMo in November 2009 that featured Vittana’s co-founder and chief executive officer, Kushal Chakrabarti. One issue Mr. Chakrabarti discussed was the focus to provide student loans rather than scholarships. He said, “Students do not want a hand-out, they want a hand up. A loan enables them to go to school without feeling beholden.” He explained that small monthly payments provide an easy way for students (borrowers) to repay the money. In fact, many students actually begin repaying ahead of schedule, which represents their personal drive for financial responsibility.

Recognizing the impact of education, Mr. Chakrabarti said, “Education is income generating; more than microfinance (small loans for entrepreneurs).” In the developing world, a college graduate can earn 200-300 percent more than they would have otherwise. However, there are less quantifiable measurements that have an equal impact to the college graduate, their family and surrounding community. Single mothers gain self-confidence by receiving a college education or vocational training. Not only is she acquiring the skills to obtain a skilled job with a higher income, but she is becoming a role model to her children and perhaps other single mothers in the community. Moreover, communities become stronger by having some of its residents possess an education in high-valued professions such as teaching, medicine, engineering or law.

During his presentation, Mr. Chakrabarti noted that the typical borrowers are 18-25 years old, loan amounts range from $500-$1,500 and repayment periods last from 6-24 months with a successful repayment rate of 97-98 percent. While the interest rates vary from region to region, Vittana’s partners usually charge a 10-15 percent annual rate. And to mitigate the loss of the loan, most partners require that a close relative co-sign on the loan. It is rare that a student is unable to repay the loan him or herself, but in the case that the student has difficulty making a payment, a parent, grandparent, or spouse will ensure that the student repays on schedule.

It is important to note that donors providing funds (loans) to students through Vittana are not making a charitable donation; the loan will be returned to the donor upon repayment by the student. Upon repayment, the donor will have the option keep their money or make a loan to another student. How does Vittana generate revenue? Although not required, many people make a donation beyond the loan amount help Vittana cover their costs. Vittana also received direct financial support from individuals and foundations such as the Peery Foundation, the Mitchell Kapor Foundation, and the Crystal Springs Foundation.

Here is a video that highlights Vittana’s operations through testimonials of students receiving loans through this innovative application of microlending:

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