Charities are essential for addressing the needs of those not served under a free market, but they just don’t give me the bang for the buck I am looking for as a student trying to make the biggest impact in the world on a student budget.
I don’t know about you, but I want to leave this world having given back much more than I have taken; to make a lasting, meaningful, positive impact. I pursue a career in finance so that I can leverage my impact using the assets controlled by the global capital markets; I pursue a passion for social entrepreneurship because I want to see my impact in the real world, creating sustainable business models that can scale, visibly improving millions of lives.
As a student, my small budget means that much of my impact today comes from my own time and effort – the two resources students have in more abundance than any other demographic; however, to scale my impact I need to be able to utilize capital for good. The traditional school of thought has been to donate money to charity, but traditional charitable models don’t offer the opportunities for scaling the impact made by each dollar donated.
I sometimes get dismayed when I donate $25 to a charity, asking myself what that is really going to do in the fight against cancer or solving world poverty. Many argue that $25 can go a long way, that I could save 4 lives by donating $25 to buy mosquito nets, or 40 meals for the homeless. Think about how much money would be raised if everyone in the USA donated $25, they tell me.
Well put it this way: if everyone in the USA and Europe donated $25 towards fighting poverty, we would raise just shy of $21 billion. Sounds like a lot, right? But that figure pales in comparison to the roughly $73 billion spent in 2013 on agricultural subsidies in the EU alone. The challenges being tackled by charity are massive in scale, but the system we have established to tackle these challenges is puny in comparison, because it is predominantly based on generosity, not on real incentives.
My Problem With Charity
My real gripe with charities is that I feel like they use their resources inefficiently at tackling the problems they are trying to solve. Dan Pallotta’s TED Talk articulates these deficiencies far more eloquently than I ever could, but to put it simply, Charities operate like a firm that pays out all its profits to its investors in the form of dividends, rather than retaining some income to reinvest and grow the firm.
This mindset of making sure each dollar donated goes to “the cause” gives philanthropists a healthy ego boost, but doesn’t allow the charity to build the infrastructure and support network it needs to scale and allow each dollar donation’s impact to multiply.
As a result, my $25 investment probably results in $18 worth of funds to tackle the problem. I would much rather see just $5 go towards the problem, with $20 spent to building an infrastructure to help scale the solution once it arrives – incentivizing CEOs, investing in long-term, risky projects and hiring a world class sales team – so that my $25 could reap $1,000 of additional donations.
My Donation Solution – Microfinance
Given my dismay at the lack of impact I was able to make through traditional donations, imagine how happy I was when I first heard about Kiva. Suddenly my $25 investment could be used over and over and over again as lenders made repayments – I was multiplying the impact of my donation.
Kiva’s arrival allowed me to put more money to alleviating poverty than I had ever been able to do before. Because I was confident that I would receive the vast bulk of my principle back, I was happy putting $400 of my savings into Kiva loans, content in the knowledge that my money was being put to good use rather than sitting idly in a 0% checking account.
Zidisha – The Evolution of Microfinance
Kiva’s success is entirely predicated on the generosity of its lenders to contribute funds that are repaid with 0% interest; clearly, Kiva offers a high Social ROI, but there is still no financial incentive to donate through Kiva: enter Zidisha.
Zidisha operates in a similar manner to Kiva, but it cuts out the intermediary Microfinance institution, directly connecting borrowers who themselves post loan requests online with lenders. As a result, lenders can have direct conversations with borrowers and more importantly, lenders can charge an interest rate on the loans they disperse, adding a financial return to the social return offered by loans on Kiva. Rates are low, typically just 2% or 3% APR, as they are chosen by the borrowers and have a higher chance of default than Kiva loans, but to date I have made a positive return on my disbursed loans. Zidisha itself has come under a bit of controversy lately (read here and here), but I still believe there is a net positive outcome under this model.
Now that I can make a return on my social giving, I am more than happy to allocate even more funds to making a social impact through Zidisha, categorizing the investment as “savings” rather than just charitable giving. Not only am I making a scalable impact but I am setting myself up to grow my capital base and reinvest in myself, so I don’t end up making the same mistake that traditional charities make by expending all income as soon as I receive it.
MFI’s aren’t the complete answer
Using Zidisha, I have found a way to scale the impact of my student budget, and I encourage other students to look into doing so too; however, we can’t have everyone donate exclusively to MFIs for the following two reasons:
- MFIs do social good by providing financing to a group of people who might otherwise get access, but they help a very specific group of people. The pyramid above shows how “the poor” can be broken down even further. Microfinance does an amazing job of servicing those in the “sufficiency” category, but it can’t touch those at the very bottom of the pyramid. The poorest of the poor cannot be burdened with debt, and must be raised from destitution through humanitarian aid before they can even attempt to access financing through MFIs.
- The world still needs traditional charities. My initial reaction upon uncovering Zidisha was that all of society’s ills could be cured under a similar model, whereby we could leverage the wealth in capital markets to tackle poverty, climate change and cancer for a low but positive ROI. Unfortunately that is not the case as many problems can only result in intangible benefits (such as a healthy or well-educated workforce), and traditional charities are more necessary today than they have ever been. Those who can afford traditional philanthropy should continue to do so, but they should challenge the charities they are working with to search for ways to invest and scale their impact. The Gates Foundation would be my charity of choice, but Peter Singer offers his selection of high-impact charities here.
How do you create your impact in the world?
Until next time!
3 thoughts on “Why I Don’t Donate To Charity… Yet”
Great article Ross. I’m a big supporter of microfinance as well, but you made some great points about the continual need of nonprofits
Great read, cheers Ross.