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Kiva Microfinance Loan Update & Default Rates

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I have been lending some money to people through Kiva microfinance to help alleviate poverty since 2007. While reinvesting some funds that were paid back, I noticed that I just reached $1,000 in money lent out through 40 loans of $25 each. Kiva loans do not pay any interest. Out of the $1,000 that I have lent out, I have received about $805 back, about $185 is outstanding, and I have lost about $10. Now, you should know that the people borrowing this money are paying interest rates much higher than zero but much of that interest goes back to paying operational costs and covering defaults. There has been some debate as to whether this is becoming a form of predatory lending, but I believe there is a real need for such lending in these countries. You also have to trust Kiva in their selection of MFI field partners. I also do microfinance lending at Microplace.

Right now you can get a free $25 trial to try out Kiva using my invite link (I get nothing). You basically get to make a free $25 to a person of your choosing from a developing country, but when it is paid back you the money goes back to the sponsor. I know, rather cheesy. I think you should just have to keep lending it out by making it ineligible for withdrawal. That’s what I like about this type of lending – the money you commit can help many people over time.

What? Kiva Is Not Really Person-to-Person Lending

I’ve written about Kiva before – They allows individuals to make loans starting at $25 to low-income entrepreneurs in the developing world, also known as microcredit. By doing so, you can provide affordable working capital for the poor (money to buy a sewing machine, livestock, etc.), hopefully empowering them to earn their way out of poverty.

However, Kiva may not work exactly like it suggests on their website. You’ll notice that they post up pictures and stories of people needing loans, and you get to pick the exact person you want to lend to. Back in 2007, I thought I loaned $25 to Vitolina:


Vitolina owns a set of beach fales that she rents out to back-packers or picnickers passing through the village and works hard to keep the structures in good condition. Fales are simple, small open huts with thatched roofs built in the style of the traditional Samoan house. Vitolina?s fales are situated on a white sandy beach on the Samoan coast. She readily welcomes guests and provides them with a simple roof, unbeatable views, and home-cooked meals. She will use the loan to renovate the beach fales.

However, chances are that the person you clicked on already got the loan months ago. Your money is simply going to the microfinance institution (MFI) who already lent to that person, and will use that money to lend to another future person or general project. The direct “person-to-person” link does not exist like it does, for example, at LendingClub.

There is a lot of recent discussion on the web on this issue. Thanks to the commenter who made me aware of it. Check out this NY Times article and the blog post by David Roodman that started it all.

After reading the posts and several follow-ups, it does make practical sense that Kiva can’t actually match a lender to a specific borrower – it would take too long for the borrower to get the loan. However, it does show that “good stories” do matter. Remember those “Save The Children” commercials where you’d get a letter from the child you helped? Same deal. Your money goes to the general organization, not any specific child.

As a result, Kiva has changed how it explains their loans and their homepage tagline went from “Kiva lets you lend to a specific entrepreneur, empowering them to lift themselves out of poverty.” to the more generalized “Kiva connects people through lending to alleviate poverty.”

The other common variable that is somewhat hidden away to new visitors is that while you loan money at 0%, the actual MFI will likely go on to loan money to the entrepreneur at around 30% APR. The difference pays the operational expenses of the MFI and may partially subsidize defaults in order to maintain the advertised tiny 0-2% default rates.

None of this means Kiva or microcredit is bad. Sure, it’d be nice if I could lend at 0% instantly to a borrower in Cambodia who could pay 0% interest too, but right now that’s not possible. I still plan on lending at both Kiva, but will no longer get the “warm fuzzy connection” feeling from Kiva and may direct more funds towards Microplace or Grameen Foundation.

Microlending Update: Kiva and MicroPlace Loan Performance

I saw some ads for Microplace today (probably targeted due to my internet browsing habits) and decided to check on my Microlending portfolio. If you’re not familiar, microlending tries to alleviate global poverty by offering small loans to entrepreneurs in developing countries who would otherwise not have access to credit.

MicroPlace
Microplace is actually a for-profit site owned by eBay that packages microloans into investments with varying risks, focuses, and returns. Some people think that “for-profit” equates to evil, but I don’t agree. Here’s a link to a recent newscast done by CBS News.

I currently have $1,200 invested there, ranging from a 100% liquid note paying 1.75% interest to a 3-year note paying 5% interest. Payments are made quarterly, and I haven’t gotten my first interest payment yet. You can even fund using your credit card via PayPal.

Here are my previous posts on Microplace.

Kiva
Kiva is a non-profit site where you can match up your contributions to a specific individual, starting with as little as $25. The entrepreneur is still charged a certain interest rate, but you don’t get any interest. I have lent out $350 to 14 loans, and all have paid back my principal so far except for one which paid back 92% total. Still, my overall default rate is only 1.32%.

Here are my previous posts on Kiva.

I am still very intrigued by the idea of setting up a pseudo-”foundation” to which I can contribute money and have it perpetually reinvest the principal and any interest earned into future microloans. It would be really cool to have something like $100,000 constantly being lent out to entrepreneurs around the globe.

Kiva Review: Giving a Virtual Hand Up, Not a Handout

I’ve written about Kiva before, but since I loaned some more money out today I thought I’d bring it up again. Kiva.org allows individuals to make loans starting at $25 to low-income entrepreneurs in the developing world, also known as microcredit. By doing so, you can provide affordable working capital for the poor (money to buy a sewing machine, livestock, etc.), empowering them to earn their way out of poverty.

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So far I’ve lent money to people in Samoa, Ecuador, Ukraine, and Azerbaijan. Now, even though I’m not earning any interest on the money I loan out, I’ve read that the borrowers do pay interest on the order of 10% or more. However, these rates are still much better than their alternatives from loan sharks, and the interest goes to fund the local operations. You can view the interest “lost” as charity if you’d like. I kind of just see it as lending money to a friend – no interest, but you’re hoping to create some positive change. Payments are handled through PayPal, and they have a 100% repayment rate so far.

Here’s my favorite loan so far:

Vitolina owns a set of beach fales that she rents out to back-packers or picnickers passing through the village and works hard to keep the structures in good condition. Fales are simple, small open huts with thatched roofs built in the style of the traditional Samoan house. Vitolina?s fales are situated on a white sandy beach on the Samoan coast. She readily welcomes guests and provides them with a simple roof, unbeatable views, and home-cooked meals. She will use the loan to renovate the beach fales.

I would certainly pay for that! Now imagine that she makes a profit, builds more huts, and hires other Samoans as employees. She’s now making a self-sustaining living for herself and several other people. I get my money back, and can lend it out again somewhere else across the globe. Beautiful.

Modest Needs and Kiva: See Where Your Money Goes

One of the things I don’t like about some charities is the lack of specific impact. Where is the money really going? Here are two charities that use the internet to add transparency and interaction to your charitable giving. In addition, they offer a way to leverage your donation to create even better change.

ModestNeeds.org is a non-profit 501(c) charity, operating predominantly online, with a goal of helping people who live paycheck to paycheck survive past life?s unexpected speed-bumps and perhaps save them from a slippery slope to financial ruin or even homelessness. Most of their ?grants? are less than $300 and go for things like unexpected medical bills. You can see all the money requests, and even vote on which requests to fund. The neat thing is that it started with just one teacher giving 10% of his salary every month.
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MicroPlace Microlending: Free $20 to Invest

As you may know, I support microlending to poor entrepreneurs in developing countries through Kiva and Microplace. I have a little under four thousand dollars spread across both sites, and intend to continuously reinvest my principal and any earned interest to create a “foundation” where my money keep being lent out over and over. Kiva is non-profit, while Microplace is for-profit. I have lost some principal at Kiva, but none at Microplace yet. Here are my previous posts mentioning Microplace.

Yesterday after reinvesting some funds, the website provided me a link to share that appears to give any new investor a free $20 to invest. No strings attached. When the investment matures, you have the choice of either withdrawing the investment (plus interest) to your Paypal or bank acount, or reinvesting it again in another loan. Why not try it out?

Update: Apparently this link is open to any investor once, not just new investors. I just tried it for myself and it did not give me a choice in investments. The $20 will be invested in “Reduce extreme poverty in Haiti and help reverse its fortune – Sevis Finansye Fonkoze via Oikocredit GC Note”, earning 2.0% per year until April 30, 2014. You do have an alternative to simply donate the $20 instead and receive the tax deduction.

MicroPlace: Buy a $20 Gift Certificate, Get One Free

Just got an e-mail from MicroPlace that they are running a gift certificate promotion where if you buy a $20 GC, you get another $20 GC free. The gift recipient can then lend out the money to a poor entrepreneur and receive interest + $20 back later. Since the person actually gets the money back (or at least most of it assuming some defaults), and thus isn’t the same as a “$XX has been donated in your name” gift, I think it’s a cool twist on gift cards.

Give a Gift that Keeps on Giving
Give a unique and special gift this holiday season. It is a gift of connection, a gift of hope, and a gift that believes that poor people can use their ingenuity and hard work to break out of the cycle of poverty.

Your gift can help fund loans to poor people who could start a business, save, and work their way out of poverty. And when you purchase a gift certificate of $20 or more on MicroPlace, we’ll give you a free gift certificate of $20 to send to someone else on your shopping list!

To learn more about Microplace check out these posts, including my last microlending update.

Buffett: Wealth, Estate Taxes, and the Ovarian Lottery

I’ve finished reading The Snowball, and one of the things that struck me was how Buffett thought about individual destiny, meritocracy, and wealth. For one thing, he is a wealthy person who supports an estate tax for those with very large estates (currently for those greater than $3.5 million). Here’s a glimpse of why:

Wealth is just a bunch of claim checks on the activities of others in the future. You can use that wealth in any way that you want to. You can cash it in or give away. But the idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society.

I also connected strongly with a related concept Buffett termed the “Ovarian Lottery”.

I’ve had it so good in this world, you know. The odds were fifty-to-one against me born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different.

Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, “One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one this is born in the United States?” It says something about the fact that society has something to do with your fate and not just your innate qualities. The people who say, “I did it all myself,” and think of themselves as Horatio Alger – believe me, they’d bid more to be in the United States than in Bangladesh. That’s the Ovarian Lottery.

He also made a comment that if born several hundred years earlier, he and Gates probably would have been some other animal’s lunch because they did not see well and could not climb trees well. I’ve had the exact same thought, as my eyesight is really horrible. If was born in the 1700s, I’d probably be considered a cripple.

This led me to a post by a Kiva Fellow working in Uganda. Kiva is the site where you can lend as little as $25 to low-income entrepreneurs.

Any one of these people could be tremendously successful in America (economically speaking). Maybe a CEO of a prominent company, or a hotshot lawyer who wears a two-thousand-dollar suit to work everyday. But they arent. And the only reason for that is because of where they were born.

[...] I won the ovarian lottery. I am a US citizen; got a good education; enjoy great health; and came equipped with a “engineer” gene that allows me to prosper in a manner disproportionate to other people who contribute as much or more to society. I’m in the top 1% of the entire population of the world.

Kiva, to me, is simply a way for those of us who drew the best tickets in the ovarian lottery to help those who drew less fortunate ones.

Something to spread a little humility. You or I may have worked hard, but that’s doesn’t mean we didn’t get a huge head start from winning the Ovarian Lottery. Would you be where you are if you grew up in a country where nobody would even teach you how to read?

MicroPlace Review: Earn a 5% Return and Help Fight Poverty Too?

“A billion people around the world work hard every day to lift themselves out of poverty. They don’t want your charity. They want your investment. Invest today, earn a return, provide them with a livelihood.” – Microplace.com homepage.

Sounds pretty good, huh? Microplace is owned by Ebay, and is an SEC-registered broker of microfinance securities to individual investors. Loans are classified by level of poverty, financial return, length of investment, and geographical location. Recently, they got my attention by offering a 2-year loan with a promised interest rate of 5% per year, and a 4-year loan at 6%.

What is microfinance?
Microfinance is the supply of loans, savings, insurance and other basic financial services to low-income households and businesses, usually in areas where people don’t have access to formal banks. Microcredit is the extension of very small loans (microloans) to these poor entrepreneurs. A big name in this arena is the Grameen Foundation.

Tell me more about this 5% return…
Here is the loan listing page, and here is a link to the long 63-page prospectus for these Global Poverty Alleviation Notes (how’s that for an investment title?). I have looked through it, but haven’t digested it all. They are offered by Micro Credit Enterprises (MCE), a 501(c)(3) nonprofit organization. MCE seems to focus on women entrepreneurs, which have made up about 90% of their borrowers. They seem to participate in a variety of countries on 4 continents, from Armenia to Bolivia to Cambodia.

These notes are not a mutual fund, and is not FDIC or SIPC insured. These are unsecured debt obligations, with partial backing of “philanthropic guarantors”. Basically, wealthy individuals and/or groups promise to repay parts of this loan if there are enough defaults. The details are a bit vague, but there seems to be a networked agreement across multiple guarantors. However, risks definitely remain.

The actual interest charged to local microfinance institutions (MFIs) are stated to be from 8-10%. The rates paid by actual individuals are not stated, but can be as high as 30%. But these are often short-term loans to people with no collateral and few alternatives. The historical repayment rate is listed to be 96%.

What about MicroPlace vs. Kiva.org?
Kiva.org also lends small amounts to low-income entrepreneurs in the developing world. However, Kiva currently does not offer interest to lenders since it is a non-profit organization and is not registered with the SEC. Also, it has more of a person-to-person lending structure where you can choose the specific person you wish to lend to. However, I have read that Kiva is trying to offer interest in the near future.

Are you going to invest?
I’ve put some money to “work” at Kiva already, and my personal repayment rate on my completed loans from Kiva has been 98% so far. Given that I am still not very familiar with these investments, I still can’t treat the 5% Microplace note as a reliable investment. However, I am still leaning towards putting a chunk of money into it, because I do think significant principal loss is unlikely, and I want to give them a chance. If it works out, I think microfinance would really take off if there was also a financial benefit to investors.

Do I Need To Make Any Last Minute Year-End Tax Moves?

Yikes, I’m cutting things close this year. Time to see if there are any last-minute things I need to do with the last two business days before 2008.

Selling Losing Stocks or Mutual Funds
If you have some investments that are currently in the negative and you don’t want anymore, you might consider selling them and taking the loss. This is because you can deduct the loss against your other capital gains, or even reduce your taxable ordinary income (up to $3,000 each year). In general, people like doing this. You can’t buy the same “substantially identical” investment again for 30 days though, as that would break the IRS wash sale rule.

If you have some index funds that have high unrealized losses, you might even sell them and buy a similar fund at the same time. Again, the general idea here is to take advantage of the fact that the IRS tax capital gains and capital losses differently. Losses can “save” you money at your ordinary tax rate (up to 35%), while long-term capital gains are capped at 15%. More information and an example of this technique here.

I don’t have anything that I’m looking to sell, as most of my investments are in tax-deferred accounts. I have a $31 loss right now in BRSIX, but that’s not worth the potential commission of buying a similar fund.

Make A Tax-Deductible Donation
If you mail in a donation (including a check or credit card info), it must be postmarked by December 31, 2007. Be sure to get a receipt! Usually the easiest thing is to just charge it on your credit card in time. That way you have your credit card statement as backup, and you’ll also earn some cashback rewards while you’re at it. This is the first year we might actually get to itemize our deductions, so that’s kind of nice.

On a side note, all of my Kiva loans are still doing fine, and one was even paid back early (the somewhat-controversial one from apparently-rich Ukraine!).

Using Up Flexible Spending Account funds
Our usual routine is to spend the rest of our FSA money on contact lenses solution, eyeglasses, Benadryl, and Aleve at Costco. From last year, here is a big list of things that qualify for Flexible Spending Account reimbursements. If you don’t have any immediate needs, Mapgirl had a good suggestion that you can complete your first aid/emergency kit with things like gauze that don’t expire.

DonorsChoose pfblogs.org Financial Literacy Challenge

DonorsChoose.org is another way the internet is making giving back more transparent and easy to do. (Learn about Kiva and ModestNeeds as well.) On the site, teachers submit project proposals for materials or experiences that they feel will benefit their students, and donors can choose which specific project to fund.

Proposals range from “Magical Math Centers” ($200) to “Big Book Bonanza” ($320), to “Cooking Across the Curriculum” ($1,100). Any individual can search such proposals by areas of interest, learn about classroom needs, and choose to fund the project(s) they find most compelling. In completing a project, donors receive a feedback package of student photos and thank-you notes, and a teacher impact letter.

In proper ‘finance geek’ fashion, blogger OneBigMortarBoard has formed a special Topical Challenge that focuses on projects that promote financial literacy amongst kids. Sounds like a good idea to me! I also like the idea of funding local schools, or even schools that you went to.

If you are looking for another direction for your charitable money, definitely check it out.

2006 In Review: A Year of My Money Blog

Out of the 637 posts that I scribbled this year, here are the ones that represent the good, the bad, and the fun of our 2006 financial adventure:

The Good
First, I started it off right by making financial goals (which give you something to focus on all year) instead of resolutions (which you end up looking backwards at).

Marriage and money are tightly linked, and behind the scenes this blog has spawned many a discussion about frugality and priorities. This has helped us limit our excess spending by focusing our energies towards a common purpose.

Of course, once you’ve saved it you still have to avoid the tax man. We maxed out our Roth IRAs and opened up and funded a Self-Employed 401k account. I’m very happy about that.

Finally, through the internet we have also found Modest Needs and Kiva, which give us new outlets to give to charity.

The Bad
Of course, there is always things I need to work on. We are also still on the look out for a method of tracking our spending that works for us, despite finding a bunch of free budgeting tools to help us.
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