Archive for the ‘microfinance’ category

Small, local banks are better

July 19th, 2009

In guest article in The Economist, Justin Lin, chief economist at the World Bank recommends that developing countries take a different approach to banking than the developed countries. Instead of focusing on building out advanced stockmarkets and encouraging large diversified global banks, developing nations should instead focus on encouraging small, local banks which focus on providing financial services to small businesses and households.

He sites the success of countries moving from low-income and middle income which focused on more simple banking systems and only gradually liberalized their capital markets as their GDP per person grew. He also sites how attempts in sub-Saharan Africa to create stockmarkets have largely not got much traction.

He suggests that local, smaller banks focus on serving industries for which the country has comparative advantage … that is, something they do well compared to other countries … which has been the strategy successfully employed by South Korea, China, Malaysia and others.

He also calls on the need to create credit and collateral registries along with reasonable legal systems for dealing with the inevitable failures. For instance, banks will be much more willing to lend to a manufacturing business if they know the collateral pledged is that already pledged to someone else. Also, when banks or businesses fail, there needs to be a timely process for liquidating in order to enable capital to flow to the successful businesses in the economy.

He identifies microfinance banks and other non-banking financial companies as being critical to developing countries financial systems inferring that these institutions should get more support from governments to expand their operations.

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Posted in credit registry, financial systems, microfinance, world bank

Urban housing for the world’s poor

July 6th, 2009

One of the largest market failures has been the lack of reasonable housing options for the developing world urban poor. But this may soon be changing.

If you’ve been to a developing nation city in the past 20 years, you have likely observed the historically huge migration of people from rural to urban. This is driven by both the lack of opportunity in most rural areas and the relative increase in economic opportunity in the cities. The result is the massive growth of slums or so called informal or extra-legal housing. In fact, while most of the housing does not include any legal rights for the residents, an informal model has developed for buying, selling and renting which is managed through local systems which aren’t part of the government. The trouble is that since this system is outside the legal system that it costs more to administrate and property cannot be used for collateral and other important benefits. Hernando Desoto has written extensively about the issue of property rights.

Recently, The Economist reported that there are new approaches to creating affordable housing starting to show up in India. In Mumbai, a reasonable size flat can easily fetch $500,000 which is way above what most Indians can afford. So, developers are now building extremely basic flats outside the city (within commuting distance) targeting price points that are affordable for many more Indians. Ashish Karamchandani of Monitor Group India notes that there are already 23M urban families in India with incomes of 60,000-130,000 rupees ($1,200-$2,500) per year who can afford these new type of flats (typically with payments of 30-40% of their income).

When I met Ashish in Mumbai earlier this year, he was very excited about this opportunity to transform India urban housing. Ashish and his team have been working with Geoff Woolley, a social venture capitalist to develop a business plan for expanding low-cost urban housing in India. Geoff told me a few months back that once the financial crisis hit that suddenly all of the housing developers who had been 100% focused on [now over-built] high-end housing and had no interest in high-volume, lower cost housing were suddenly converts to the new opportunity. Geoff has also been negotiating with some of the microfinance organizations to find clients who were ready and financially qualified for the new housing. If they are able to pre-sell the low-cost housing, then the developer can dramatically reduce their financing costs which means that much of this savings can be passed along to the buyer with still a reasonable profit for the developer. A win-win!

I think India could be a pioneer in finding solutions to this important social problem which could possibly then be “exported” to other developing urbanscapes.

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Posted in housing, india, microfinance

Kiva provides microloans in USA

June 10th, 2009

Kiva, a pioneer in making microlending participation possible for almost anyone in the USA at $25 at a time, has focused to date on lending to microbusinesses in developing/low-resource countries. Many of these loans were a few $100’s with the largest around $1,000 per individual business.

Recently has begun facilitating loans to low-income self-employed entrepreneurs in the USA. Note that these loans are really not “microloans” with the current loan sizes of $1,000 to $10,000 with median around $5,000-$6,000. These appear to be instead unsecured loans to businesses which have no access to credit.

Here are a couple of examples:

Anibal is raising $4,500 for his decorative painting business

See details on his loan request

Carl is raising $4,000 for his window washing business

See details on his loan request

I think this is going to be an interesting experiment. Clearly there are challenges for many USA small businesses getting access to capital which has only be exasperated with the current financial credit crunch. It will be interesting to see what the repayment rates are going to be on these loans.

Does the higher capital requirement result in a lower social impact?

One things about microfinance pointed out by A Billion Bootstraps book is that lending a $100 goes a LOT further in terms of number of lives impacted in a low-resource country than in a developing country where the capital needs appear to be on the order of 10x higher.

Small services businesses often need capital for purchasing equipment

Still, I think that this is an innovation for financial services worth watching. As many of you know, I recently launched a new website for helping homeowners find recommended local plumbers, home cleaners, painters, locksmiths, handymen and much more called HelpHive.com. Our marketplace is attracting a range of services businesses from the national chains all the way down to the smallest window washers, lawn care specialists and pressure washing specialists. These smaller business are often single person businesses sometimes hiring a helper or two. Many of them have needs to purchase equipment which they could easily afford through earnings if they had access to financing. Kiva might be their answer … much better than the payday loan vultures or the loan sharks!

Here is a list of current Kiva USA entrepreneurs seeking small business loans.

What do you think about the opportunities or challenges for microcredit in the USA?

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Posted in microcredit, microfinance, usa

India microfinance and tightening credit markets

May 20th, 2009

I was recently in India and had the chance to meet with a number of microfinance CEOs, bankers and insiders in the microfinance industry including Unitus, Unitus Capital and Unitus Equity Fund staff. One of my key inquiries was how was the global financial crisis affecting MFIs ability to access capital. Accessing capital from 3rd parties is a critical issue for Indian MFIs as they are prohibited by the Reserve Bank of India of accepting deposits as a source of capital. While an increasing number of the MFIs are generating some profits, the profits are insufficient to support their lending growth needs, so they need to go to outside sources for most of their capital needs.

A few highlight observations:

Large MFIs. The large MFIs are continuing to have access to sufficient capital for their growth needs. One large MFIs chose to slow down growth in late 2008 in order to test the new market conditions for credit, but is now operating once again growing its lending. SKS, based in Hyderabad, announced closing $75M in new equity capital late in 2008.
Securitization. (Wikipedia definition) Spadana announced $20M securitization in late 2008. In Feb 2009, SKS successfully securitized $40M of their loan portfolio with ICICI Bank. Then just last month SKS announced a $20M new securitization deal with YES Bank which received the highest rating from credit rating agency CRISIL. Securitization has gained a notorious reputation in conjunction with the USA mortgage crisis, but implemented prudently (with strong underlying assets) it is an important and valuable financial vehicle.
MFI Valuations. Valuations for all MFIs are down with smaller/earlier-stage MFIs being hit even harder. This is not a surprise as equity has become more expensive with the tightening financial markets, but it none the less is a shock to many MFIs who need more equity capital to keep growing. There are different responses to this. One MFI CEO I met with said that they were going to not raise equity capital right now and have made consequently made a decision to dramatically slow down their growth.
Donor Capital. Donor capital for non-profit MFIs is largely dried up. Because of the prominent success of a number of for-profit MFIs, non-profit MFIs are struggling to raise donor capital needed for growth. This is a significant problem as MFIs need to get to a certain scale before they can be financially sustainable. I met with one MFI CEO pioneering work in a very underserved area of India who had to stop most new loan disbursements because they don’t have a strong enough capital base in order to get additional on-lending capital from banks. Without getting more scale, they will not get to profitability and therefore are stuck in a very difficult position.
MFI On-Lending Capital. The good news is that the government mandates for banks to lend a certain percentage of their loans to support the poor (called the priority sector requirement) is still in place and microfinance is still getting a large allocation of this. The bad news is that the banks are becoming more risk adverse and many are looking to concentrate their lendings to fewer larger (less risky) MFIs. This means that some of the MFIs which are most innovative and tackling some of the harder areas of India are finding it harder to raise on-lending capital.

My net: Overall, microfinance in India is continuing to expand despite the global financial credit crisis. Much of the citizen sector which microfinance reaches are still not connected to the global financial markets and so are less affected by the macro issues. My hope is that MFIs will continue to have discipline in lending in order to keep repayment issues to a minimum in order to continue to provide these valuable financials services to the next village and the next slum.

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Posted in india, microfinance, securitization

Informal economy backstops job losses

March 24th, 2009

A recent article titled The Rise of the Underground by Patrick Barta in the Wall Street Journal, examines how the informal economy in India (and other developing markets) is providing an important alternative form of income for workers laid off from jobs connected to the global economy. Without an informal economy, many of them would be destitute as there is very little social safety net in these countries.

I was in India’s Assam region earlier this month and once again saw the power of microfinance to empower women with working capital to expand their micro businesses. I was able to interview a number of the women in this picture about how their businesses were going and what they were doing with their profits. The #1 priority they told me was to ensure their children were able to go to school.

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Posted in india, informal economy, microfinance

Credit Default Swaps vs. Microloans

January 28th, 2009

Alex Raksin posted a good open letter to the World Economic Forum meeting today in Davos called “By the people, for the people” in response to the WEF’s chairman and founder, Klaus Schwab’s opening question, “Where should leaders look to find a new transformative vision for international finance?”

Raksin contrasts the efficacy of microfinance with the disastrous get-rich-quick financial instruments like credit default swaps.

In describing microfinance, he notes “that capitalism, especially when driven by creativity and social conscience, can generate significant returns in every sense of the word — financial, ecological, ideological and cultural.”

This is good input for many of the world’s most powerful leaders gathered in Switzerland.

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Posted in microfinance

Microfinance Heats up in East Africa

January 18th, 2009

With BRAC’s (Bangladesh Rural Advancement Committee) recent announcement of their successful raise of $62M for their Africa Loan Fund, a new benchmark/milestone has been reached for the potential growth in microfinance in East Africa. For the underdeveloped East Africa microfinance market, this is a huge amount of commercial debt capital to support BRAC’s ambitious goal of reaching 700,000 microfinance clients (families) in Tanzania, Uganda and Southern Sudan.

BRAC is a microfinance NGO based in Bangladesh which has recently started expanding their presence outside of their home country to other regional markets including Pakistan, Afghanistan, Sri Lanka and a number of sub-Saharan Africa countries. They position themselves as the “world’s largest private human development organization” (mainly based on the number of employees they have in Bangladesh microfinance operations) and leading a new kind of development effort … a southern hemisphere organization serving another southern hemisphere developing market. BRAC has been much more aggressive in expanding beyond its home borders than the much more famous Bangladeshi microfinance bank, Grameen Bank, which in 2006 jointly received the Nobel Peace Prize.

It is interesting to note that they have raised this fund in US$, but they apparently plan to make loans to country-specific BRAC MFI subsidiaries in local currency. If this is true, then the fund is going to take considerable currency risk, so they are going to have to pass on that cost in the form of higher interest rates to the MFIs. It has generally been prohibitively expensive to hedge currency transactions into most Africa countries, so someone has to “self-insure” the risk.

Please add comments with any more insights or comments you have on this transaction.

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Posted in BRAC, debt fund, east africa, microfinance

Critiquing microfinance, Part II

April 20th, 2008

This is a continuation from Part I which focused on a recent New Yorker article.

New York Times Article

Elizabeth Malkin recent wrote an article in the New York Times called, Microfinance’s Success Sets Off a Debate in Mexico where she outlines some of the issues in the debate on the commercialization of microfinance. This article focuses on Banco Compartamos, a successful microfinance bank in Mexico, which went public in 2007 resulting in a large amount of publicity on investor returns from a bank which serves Mexico’s poor.

First, if you’d like to get a deeper understanding of the Compartamos IPO, there is an excellent case study written by Richard Rosenberg and published by CGAP (Consultative Group to Assist the Poor … part of the World Bank) called CGAP Reflections on the Compartamos IPO. I have read this article in detail and found it very helpful in unpackaging the complexities, nuances and unique circumstances of the IPO which is often lost in the sound bites of both supporters and critics.

Here are a few [of the many!] facts surrounding the Compartamos IPO:

Compartamos didn’t issue any new shares as this was a secondary offering. Rather, certain shareholders sold their holdings on the Mexican stock exchange.
At the IPO, more than 2/3’s of the shares of Compartamos were held by NGO shareholders who were (and are) committed to reducing poverty.
$275M or about 5/8ths of the IPO sale proceeds went to NGOs to reinvest in their missions and the rest (about $150M) went to private shareholders.
The IPO made public (and realized in the case of the stock sellers) the investor returns which had accumulated while the company was private. That is, while there likely was some upward bump due to market conditions in the value of the shares through the IPO process, most of the investor returns were not related to the IPO itself.
At the IPO, the market valuation of Compartamos was approximately $1.5B which represents a roughly 100% per year compounded return for investors over 8 years.
The interest rates charged by Compartamos in terms of yield in 2005 was 86.3% (when you add required VAT, the rate to borrowers is about 100%.)

Needless to say, with these type of numbers floating around in the same sentence as “the poor” there are lots of opinions on this transaction and whether this is a positive or negative event for microfinance and ending poverty. Supporters (and even CGAP) say that this is going to result in a lot more private capital being directed to the poor resulting in a broader variety and higher-euality financial services being delivered to the poor. Critics highlight the high interest rates as gouging the poor and the amount of profits pocketed by private investors (although somewhat reduced in this situation) as being exploitive. And most everyone agrees that optically high profits in serving the poor could be used by populist politicians to argue for regulations on microfinance which could reduce the availability of financial services to the poor.

Here are some additional facts on Compartamos:

To survive the heavy devaluation of the peso and inflation in 1995, Compartamos was forced to raise its interest rates (to its current rate levels) in order to survive.
When this macro economic financial turmoil subsided in 2000, Compartamos chose not to reduce their interest rates in order to fund rapid expansion to reach new [poor] clients. CGAP report notes Compartamos’s growth rate of 46% per year post 2000 (vs. 24% in previous 4 years) would not have been possible without the higher retained profits from maintaining these interest rates.
The interest rates charged by other Compartamos are about the mid-range range for what MFIs charge in Mexico and there isn’t much difference between the high and low rates.
Of the interest earned by Compartamos, about 25% of it is profit. That is, they would make no profit if their interest rate was ~65%. [Note: when I asked the CEO of Mexican MFI competitor why they didn't charge a lower interest rate than Compartamos, he said that this would only put them at the disadvantage in their ability to fund growth of client reach. That is, they would grow more slowly serving fewer poor clients.]
Their single largest cost is “operating expense” which is relatively high because they are continuing to forward invest in opening new offices to expand their client base. They are more cost efficient than most MFIs in Mexico.
Most of Mexico’s population still have no access to bank services and credit in particular.

Here’s another interesting perspective on commercialization of microfinance titled “What would Leland Stanford do?” by Jonathan Lewis of MicroCredit Enterprises.

All of this data is hard to get your head around … yet alone come to a clear conclusion upon.

The question in my mind is whether in the long-run the Compartamos IPO will be a net positive or net negative for the poor in Mexico?

I think that on net it will result in a positive result for Mexico’s poor. The main factor is that the IPO has raised awareness of the bankability (investability) of the poor and this will attract more private capital which is the only source large enough to support the development of a broad range of financial services for the poor. While I expect that in the short-run that interest rates for microloans aren’t going to drop much, I do think that competition will drive down interest rates in the medium term as more players enter the market. I do hope that competition comes sooner rather than later in order to avert meddling by populist politicians.

Now there’s lots of fodder in this post for some controversy. So, please post your comments with as much objectivity as possible ;-) Disagreements are fine.

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Posted in microfinance

Critiquing microfinance, Part I

April 20th, 2008

It is healthy and expected for any growing trend or endeavor to receive critique and microfinance is no exception. I’ve decided to do a mini-round up of some recent critiques for those of you who might not have seen them.

The New Yorker Article

The New Yorker recently published an article by James Surowiecki called What Microloans Miss. In this article, Surowiecki argues that while microloans definitely have positive impact they are not what poor countries need most in order to get richer. He observes that the majority of people in developed countries are salaried workers, not entrepreneurs, hence we need more new small/medium businesses which hire people (he calls the “missing middle”.) He also states that microloans are often used for non-business activities including providing consumption credit during lower income periods. He calls for more focus on equity investments vs. loans to small businesses in addition to loans. In summary, he says “for some people the best route out of poverty will be a bank loan. But for most it’s going to be something much simpler: a regular paycheck.”

Microfinance network Pro Mujer CEO, Ben Moyer posted a response where he argues that “the goal [of microloans] is not to make “poor countries richer”; it is to bring desperately poor people out of poverty by helping them to become self-sufficient.” He goes on to note that “For now, the impoverished semiliterate and illiterate women receiving microloans won’t benefit from investments in the ‘missing middle.’ Microcredit will continue to offer the best return on investment, because it eradicates poverty one person at a time.”

I think that this isn’t an either/or type of issue, but an AND … that is, we need to encourage the continued growth of microfinance and new growing enterprises which create income for families in poor countries.

Microfinance appears to be the best tool available to quickly grow the income of desparately poor families to the point which they can get above the poverty line. That is, they can become relatively stable in being able to provide for their basic needs. Microfinance requires relatively small amounts of capital and infrastructure which means that it can reach and serve large numbers of families very quickly. And you can start to see income improvements in terms of weeks, not years. So, while I agree that we should not over-hype and over-promise on how microfinance can reduce extreme poverty, I also think we should not underestimate the continued positive impact it is having. More importantly, there are many countries and regions where microfinance is almost non-existent, so we need to continue to encourage increased investment to bring this baseline financial service to these families.

There is indeed a dirth of financing options available for new small business … even high-potential ones … in emerging economies. I wrote previously about this “funding gap“. Also, there is a good article by Vinay Ganti which dives further into this topic. The reality though is that this is a medium to long term contributor to emerging market income due to the nature of starting and growing these businesses. It doesn’t mean we should not start investing now!

Also, to get perspective on the reality of timelines for dramatically changing systems, I recommend Hernando Desoto’s groundbreaking book on the history, state and importance of adequate property rights described in his book, The Mystery of Capital. Desoto reviews the history and complexity of the development of property rights in the USA (and other countries) not to discourage more acceleration in property rights in other countries, but on the contrary to help articulate the lessons learned in order to accelerate property rights in emerging countries. We want to deconstruct (in order to understand) the accelerated success of new business starts in certain Asian countries over the past 50 years in order to better encourage similar growth in countries which have not yet participated in poverty reduction growth.

Read Part II

Please post your thoughts in comments.

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Posted in microfinance, social enterprise

Global Microfinance Institutions Ratings

January 5th, 2008

There are two recently released reports on the top global microfinance organizations:

Both of these are based on data collected by Microfinance Information eXchange, Inc. (MIX) which is leading market research publisher of microfinance data. Forbes rankings are also accompanied with some additional articles on microfinance.

First and foremost, I want to commend MIX for publishing this superb report. This is an invaluable tool for getting a snapshot of the microfinance industry at the end of 2007.

Here are a few highlights from the more thorough 2007 MIX Global 100 report:

Top 100 expanded grew client base an overage of 75% in 2006
Top 100 institutions which could accept savings (a minority) on average now have 2 savers for every borrower (yes, the working poor do want to save!)
India is leading the client growth with many MFI’s growing by more than 100%. Additionally, India MFIs are leading the way in cost efficiency plus interest rates with low profit margins.

A couple of quick observations on the MFIs/reporting that could be improved/refined:

Transparency. Many organizations have a transparency ranking of 100%. Frankly from my personal experience in working with many of these organizations, there is a significant need to improve transparency so the bar must be too low for the “perfection” grade. For instance, quality and independence of board of directors is an important factor.
Staff Efficiency. Banco Popular do Brasil claims 7,200 borrowers per staff member — the #1 ranking. The #2 ranking is 1,400 borrowers/staff member. Frankly, I don’t believe anything above 1,000 borrowers/staff member is an accurate report. Either the numbers are just wrong on they are outsourcing some roles which should be reflected in this ratio. Overall, I’d like to see the staff efficiency metric move to something like “margin per staff member” as many of the more innovative MFIs are launching a broader set of financial products/services which can reduce borrower/staff efficiencies, but ultimately create improved staff productivity as increased value for the client.
Portfolio at Risk. The top 57 (of 100) portfolio quality MFIs have a portfolio at risk (PAR) of 0% and the average for the top 100 is 0.0% (rounding to only one decimal). While I’m a big fan of portfolio quality, I think that this means the these organizations are not taking much risk and therefore they are not reaching their social impact potential. Somehow I think we want to discourage MFIs from having too low of a PAR (as well as too high of a PAR) to encourage innovation and risk taking.
Profitability. This is a good way to expose the MFI who have very high profits (remember from whom they are making them). I would also like to see publishing of average yield on loan portfolio as this would expose the effective interest rate that the MFI is charging borrowers and could again help outsiders’ insight. In general, I’d like to see more transparency on MFI interest rates with accompanying explainers on their cost of capital and operating costs to explain their profitability targets.
Savings. I think we’re going to start to see a lot of pressure on central banks to allow more institutions in this sector to have options for collecting and then mobilizing (re-lending) savings for the working poor. This will also have a significant positive impact on the MFI cost of capital and therefore the opportunity to lower borrower interest rates further.

If you have other comments and/or observations, please respond in comments.

2 comments »

Posted in forbes, microfinance, mix

Microfinance 3.0

November 18th, 2007

After spending time in India and the Philippines over the past few months with some of the world’s most innovative and fast-growing microfinance organizations from around the globe, I have a few thoughts on the next phase of microfinance which we are about to see flourishing over the next 3-5 years. I will refer to this as “Microfinance 3.0″.

“Microfinance 1.0″ (M1) is the model used to start most microfinance programs in most countries. M1 is generally started as a non-profit entity which is funded by donors and primarily focuses on developing a successful model for deploying microloans to poor entrepreneurs … which includes having a high repayment rate on loans and starting to move towards getting enough clients (scale) in order to become break-even with lessening reliance on donation capital. Most MFIs (I would guestimate 95%+) never graduate beyond M1 status.

“Microfinance 2.0″ (M2) is a new phase for microfinance which is characterized by high-growth of operations combined with professionalization, systemization, access to capital markets and new product development. The credit model proved in M1 is now rolled out at a dramatic new pace … opening new branches, hiring staff, implementing internal controls, etc. which require investments in computer systems, experienced management and access to capital which quickly outstrips the capability of donors. M2 orgs must build substantial business relationships with banks and investors who have the resources to support this new level of growth. This also means more accountability including a strong board of directors and much more detailed financial reporting to all stakeholders. Additionally, development of new and enhancement of existing financial products begins in order to better serve the clients.

“Microfinance 3.0″ (M3) is the next phase that is starting to emerge. In the few mature markets for microfinance like Bangladesh and Bolivia, many of the more mature MFIs have converted in regulated banks which is one of the options available to mature, sizeable MFIs. Generally, though becoming a regulated bank is not a feasible short or medium-term option for most late stage M2 MFIs. Instead, I am seeing “mature” M2 MFIs starting to pursue the following strategies:

Supply Aggregation. Selling the aggregated supply of their borrowers in order to increase the income of their borrowers. As one senior exec at a large MFI in India told me … the #1 business we are financing for our borrowers is milk-producing cows and buffaloes — we can organize the selling of their milk for a better price than they can receive today. Another MFI is providing the raw materials to their borrowers for making incense sticks which they agree to purchase back at a higher price than they could get themselves. The MFI then sells the incense sticks to retail and wholesale purchases cutting out many middlemen who historically took most of the profit/margin.
Demand Aggregation. Aggregating the buying power of clients/members in order to lower prices paid for goods by clients/members. This is similar to the Costco member model in the USA where members get access to products at a lower price due to their collective buying power. A MFI senior exec told me that they are seeing many opportunities to provide both products and services to their clients which save their clients money (e.g. on food staples) and give them new benefits (e.g. health insurance) at affordable prices and with improved quality over their current choices (or for the first time.)
Business-in-a-box. Anyone who has visited microfinance borrowers is struck by how hard they work to run their businesses to further their livelihoods. The fact though is that many of these people are not very entrepreneurial … that is, they are running businesses which have an upper limit to the profit potential. There are now a large number of true entrepreneurs developing very interesting self-employment (or a few employees) businesses which are like microfranchises. That is, where the business model, inventory supply, branding, portable kiosk, etc. is provided and with a little training an individual can without extraordinary entrepreneurial skills run an even more profitable mini-business.
Savings programs. Despite the central bank limitations of providing savings to the poor, many MFIs are actively investigating new ways to provide safe and helpful savings programs. One of the huge benefits of enabling savings is that a MFI can lower its cost of capital which they can then pass along in lower interest rates to borrowers. [I realize that savings are a much larger topic which I will expand in a future post!]

Is every market ready for M3? No. Many markets/countries are almost exclusively in the M1 stage and will be for some time. I am providing this proposed M1/M2/M3 framework to explain the evolution of financial services to the poor as it matures in specific markets over time. I am excited to see that the poor are increasingly being viewed as “investable” … a good and reasonable investment. While this has the risk of potential for exploitation (like with payday lending in the USA), I think that there are many more upsides overall which benefit the world’s poorest.

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Posted in demand aggregation, microfinance, microfranchise, poverty, supply aggregation

Ebay enables investing in microfinance

November 18th, 2007

Ebay recently opened a new web site called MicroPlace which enables individuals to make loans to the world’s working very poor. This enables what I refer to as Socially Responsible Investing version 2 … choosing to make a positive social impact with your investing.

Here’s generally how it works:

You can preview the investment options … currently there are 15 choices of microfinance institutions (MFIs) across 11 countries. The term of the loans ranges from 2-4 years and the interest rate paid ranges from 1.5-3% per annum.
To make an investment, you create an online account…email address, password and then [unfortunately] a lot of personal information which they are required to capture as a securities broker.
You can then invest a minimum of $100. This means that almost anyone can invest which is great! You fund your investment through Paypal (another Ebay company) or directly with a checking account transfer.
Once you’ve made your investment, you can track it on their web site.

I have written previously about Kiva, another way to provide loans to microentrepreneurs. I thought it would be helpful to compare and contrast these two services.

Here’s a summary comparison … Kiva let’s you loan directly to a specific borrower which is much more personalized. The downside of Kiva is that you are receiving no interest on your loan. On the risk (of getting your loan repaid) side, with Kiva you need to manage your own risk by splitting up your loans across multiple borrowers whereas you’re investing in a fund with Microplace so your risk is already diversified across a group of borrowers (although typically with one MFI). Generally, Kiva loans are shorter duration. Currently Kiva provides many more countries and MFI partner options … although because of its popularity there are often on a few borrower loans listed at any given time.