Microfinance

The benefits are many, here are some of them:

You get a high interest rate. Usually higher than you would ever get in a bank (see Risks, too)

You help people help themselves.

The borrowers evolve businesses and eventually hire people. Thereby starting a good spiral and improving life in their communities and countries.

You show trust to people who really need it!

You get the warm feeling inside for doing something good.

Lending money to poor people does pose some risks.

Defaulting the loan will happen occasionally. Your loss will be, whatever is not repayed.

Currency fluctuations. Third world countries tend to have unstable currencies. So even if the loan is repayed, and you get a good interest rate the total may be less than expected because the local currency has dropped in value.

Taxes. Most countries withhold taxes on investments. You should be able to get a refund from your own tax authorities.

Microlending is relatively new! The financial risk is not really known.

How to reduce the risks
The key to reduce the over all loss on currency and broke businesses is spreading your investments!

Invest in several countries to reduce the effect of one countries unstable currency.
Invest small amounts in many businesses to reduce the risk and effect of defaulted loans. Better invest 5 Euros in each of 10 different businesses, than 50 Euros in one business.
Invest in different kinds of businesses (service, industries, farming, trading etc). to reduce ill effects from natural catastrophees, political climate etc.
Use more than one microfinance service. If, for instance one has to stop business due to financial reasons (they could go bankrupt, too), then you might only lose part of your investments.

I started out in August 2008 by adding 150 Euro (approx 1.100 DKK or 210 US$). And now I upload and invest 100 DKK (approx 19 US$ or 13 Euro) each month on MyC4.

50% of any money earned on this lens goes to KIVA (a microlending organisation). Rest goes to me.

A few figures from my MyC4 account (June 2009):
I am currently invested in 17 businesses.
3 businesses have defaulted. Total loss of 33 Euro.
Currency fluctuations has cost me 5.54 Euro.
Interest earned (after currency losses and taxes): 7.73 Euro
That's an effective interest rate after tax and currency loss of 5.2%

Don't get it wrong; donations are useful and helpful in many places! But:

Passive help (donations) can feel degrading to the recievers, whereas active helping (lending with a responsibility to pay back) shows trust.

Donating money is a good idea, especially if the recievers are very poor. Money to create or maintain a business may not be of much concern, if you are starving!

Microlending, is the next step. Some third world countries are poor, but not catastrophically poor. Small businesses can only borrow money from banks at outrageous interest rates (30%, 50% or more).

Most people from the western world has no way to earn interest above a few percent, so giving a loan for maybe 12-18% interest may be a decent investment for you, and a great opportunity for a business in Africa. That's a win-win situation :-)