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How are Microfinance, Crowdfunding, and Peer-to-peer Lending Different?

How are Microfinance, Crowdfunding, and Peer-to-peer Lending Different?

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Published by: Crowdsourcing.org on Nov 08, 2010
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How are Microfinance, Crowdfunding, and Peer-to-peer Lending
Rob Garcia
Whenever I get the chance to speak at an event about peer-to-peer investing and personal loans, I consistently get the following
questions: “Isn’t the concept the same as Kiva?”, “Are you not the same as Grameen Bank, but in the US?”,”It sounds like
Kickstarter or IndieGoGo, no?”.
The answer to all three questions is “No”. Even though peer-to-peer lending, crowdfunding and microfinance share the same core
concept, they are very different in their purposes and implementation. Here is an attempt to untangle your brains:
Crowdsourcing refers to the idea that a group of people can accomplish something that would otherwise be impossible for an
individual to do alone. It involves turning to the general public or group of experts to address a need for ideas or work. The
concept is based on the philosophy that the “collective” is wiser than any one person.
Arguably, the most successful web-based example of crowdsourcing isWi ki p e di a, which has become a legend, taking on
encyclopedias by enlisting collaborative content sourcing and reviewing. Another pioneer in this space is9 9 De si gn s, which
enables crowdsourcing of visual design work online. Matt Mickiewicz, co-founder of 99Designs, explains that his company“i s
all about providing opportunities to designers to build their portfolios, find work, build client relationships, hone their skills, and
have fun. On the other hand, we bring affordable, high-quality graphic design to start-ups and small businesses who in the past
simply couldn’t afford it.”
Crowdsourcing is also to outsource work to the masses, independent of location. Amazon’s Mechanical Turk is one of the better
known brands in this area, but two more recent web-based crowdsourcing marketplaces are making the concept more popular
nowadays:oDe s k andCr owd Fl owe r.
My favorite application of the crowdsourcing concept is the process of collecting ideas from users to improve a product or
service. Check outUs er Voi ce and Get Satisfaction for ways to create more intimate and effective product feedback loops with
your customers.
Crowdfunding describes how the collective pools together money to support an initiative or project. Crowdfunding has
historically been used for political campaigns, disaster relief (charitable donations), government support (taxes anyone?), and
public projects. Anti Hannula, entrepreneur from Finland, argues that the pedestal where the Statue of the Liberty is placed today
wascr owfu n d e d.
More recently, crowdfunding has seen a resurgence on the Internet on sites likeKi ck st a rt er orIn d i e GoGo, where artists,
entrepreneurs, and communities seek support for their ideas and projects from the “4F Bank”: fans, friends, family and fools.
The individual seeking monetary support typically offers something in return for a donation, such as an autographed CD,
discount on a art piece, or free access to a service.
Microfinance consists in providing of financial help to low-income families or individuals who traditionally lack access to
banking and loans (a.k.a. the “unbanked”). The concept was pioneered by Muhammad Yunus, economist and Nobel Peace Prize
recipient from Bangladesh, who devised a model to extend loans to entrepreneurs who were too poor or lacked the sufficient
credit history to qualify for traditional bank loans. He put his model to work by creating Grameen Bank: banking for the poor.
Kiva is probably the most known of a myriad of web-based microfinance institutions and facilitators. Premal Shah, president of
Kiva, describes microfinance as ” the way to empower others to lift themselves out of poverty.”
Peer-to-peer Lending or Investing
Peer-to-peer Lending is defined byWi k i pe d ia as for-profit financial transactions occurring directly between individuals or
“peers” without the intermediation of a traditional financial institution. When you look at it carefully, you will realize that this is
how lending was done centuries ago, before banks emerged and became the norm: communities borrowed and invested directly
in its members. The Internet has now made this concept available to virtually anyone, offering an opportunity for borrowers to
get better rates, and investors to earn better returns.
Zopa was the first peer-to-peer lending network, opening its Internet doors 5 years ago in the UK, and growing very rapidly in the
last couple of years. Giles Andrews, General Manager of Zopa, describes his company as “a marketplace where people can lend
and borrow money to and from each other, sidestepping banks”.

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