Microplace Review: Investments, Application, Funding Methods, Bonus

I finally got around to looking closer at Microplace, a site owned by eBay that tries to alleviate global poverty by offering investments that enable loans to hardworking poor people. I wrote about them previously in Earn a 5% Return and Help Fight Poverty Too? but never ended up investing.

These microlending investments offered do carry risk to principal, although historical repayment rates have averaged 97%. I have just finished putting in $1,200 across three different loans of different maturities and interest rates. This a decent chunk of money, but again this is both an investment and a charitable gift. As you’ll see below, I have the potential to earn some interest and/or maintain liquidity. I like the idea of this money being repayed and then loaned out again later, ideally over and over again. My own little mini-foundation. ;)

My Investments
This is an experiment for me, so I wanted to try a variety of investments. I believe that if microlending can be both profitable and successful in reducing poverty, it will really take off. I went with some of the higher-yielding notes and also one with high liquidity. We’ll see how the repayment rates are.

Investment #1: Helping Poor Women in Nicaragua, Earns 4% interest per year, Principal repayment on 12/31/2010.

Investment #2: Help Nicaraguan farmers, Earns 5% interest per year, Principal repayment on 12/31/2011.

Investment #3: Called the Oikocredit Global Community Note, this investment enables loans to the working poor in several developing countries. 1.75% return per year, can redeem anytime. This last one is interesting because you can withdraw your principal at any time. I can already redeem only a day later:

Application and Funding Methods
The application process is very similar to signing up for a stock brokerage account. They will ask you identity information as well questions about your income and investment experience because they are selling securities that carry risk of loss. As for funding the loan, you can either use PayPal or a bank transfer:

Since eBay owns PayPal and Microplace, there are no fees for using PayPal. That means you can switch to a rewards credit card and earn some points or cash along with your investment. Why not? Just be sure to change your PayPal funding source. My credit card charge went through fine.

Got Bonus?
You know me and freebies. After signing up I received another e-mail about a Father’s Day promotion where you can even get a free solar-powered flashlight:

Invest as little as $20 in honor of Dad and MicroPlace will send a free solar-powered flashlight, to Dad. This eco-friendly flashlight will remind Dad how grateful you are for his caring and love. And your investment will help fathers and families work themselves out of poverty so their children can get an education.

Comments

  1. So what happens if the loan isn’t repaid? I’ve browsed around the website and can’t seem to find an answer. Since the borrowing organization is a 501(c)3, is it a charitable donation? Or since the loan is classified as an investment is it considered a loss?

    I’m curious about tax implications of the investment/donation!

  2. thanks for this post. really interesting website and alternative way of trying to make some money in this tumultuous economic environment right now.

  3. I have been lending through Kiva.org for a couple of years now and am excited to lend through Microplace as it offers a few advantages over Kiva (namely that you can earn a small return on your investment and that you are not asked for additional donations since the borrowers fund the site operation). I would warn, however, that most people new to microlending would probably want to break their loans into smaller pieces than Jonathan has here. Although repayment rates are very high, these loans do default, and when they do, it seems it is generally because there is a problem with the local microfinance organization rather than default of the actual borrower. I believe that the way it works is that local agencies generally charge the ultimate borrower a spread over the rate charged by kiva or microplace. This spread helps cover their costs and creates a cushion so that if some borrowers default, the agency can repay their loans and keep its high repayment percentage (which is key to getting funding). However, if there is a problem with the local agency itself, all of its loans can go into default, regardless of whether the local borrower paid or not, as a result of the way the payments are pooled and transmitted through the agency. This happened with one of my loans through Kiva. My outstanding balance was only $20 at the time, so the loss wasnt a big issue, but since then I have been careful to give more loans in smaller denominations, and to diversify among local agencies in addition to individual lenders (both sites list the local agency when you pick a loan – if you dont pay attention to the local agency and want to focus on a particular country, you can easily end up with a lot of loans through the same agency). I think that microlending is a great way to held individual entrepreneurs around the world, but I also know that taking a $500 loss as a result of a default could potentially sour the experience for me, so diversification gives me peace of mind.

  4. I appreciate the review of Microplace. I feel that if you are going to fund loan(s) through this program, one should look at it as more of a charitable gift than a way to make great returns on your money. I will be making a personal review of this site, to see if this is something I would like to put some money towards and recommend to my readers.

    Thanks again.

  5. Thanks for sharing info on this. When you withdraw money, does it goes back to paypal account or credit card on which it was charged? any idea?

  6. After reading Matt’s comment above regarding whether your investment can be considered a charitable donation and what the tax implications may be, I did some digging on the MicroPlace website and found this link: https://www.microplace.com/customer_service that should answer the question regarding tax implications.

  7. I always find myself needing a flashlight when there’s all that solar power around. ;-)

  8. Ya Mike, here’s hoping it comes with a battery slot.

    I read through the Oikocredit Global Community Note prospectus, which said they have written off just 1% of loans annually over the last 5 years, but it was not clear to me what that would mean for investors, if anything.
    It seems rather like a money market, just built on microfinance instead of corporate and gov’t bonds.

  9. From Microplace FAQ:

    Why is MicroPlace about financial investments and not donations?

    Many in the microfinance industry believe that there is insufficient donation capital available to fund the growth of microfinance. Many microfinance institutions recognize that accessing investment capital is key to their growth. With this investment capital, these institutions can grow more quickly and serve more of the working poor.

    Furthermore, investments have a positive impact on the efficiency of the microfinance industry. To access commercial capital, microfinance institutions have to be attractive investments. This means that they have to operate efficiently to grow and expand their services. Efficient operations result in more borrowers which results in an increase in the overall demand for microfinance services. This virtuous cycle benefits all participants in the chain and results in healthier microfinance organizations and fewer people in poverty.

    Personally, my dream is to put in a thousand or something every year, reinvest the interest in more microlending loans, and one day having a $50,000 or $100,000 revolving loan amount.

  10. Yeah, I remember joking around that solar-powered flashlights were as useful as screen doors on submarines. :)

    But joking aside, if these are the current versions of solar-powered LED flashlights, they store a full charge for 3 years

    http://www.hybridlite.com/

  11. Hurray, 14 friends so far, and 3 full loans funded! (A “full” loan varies, but might be $700 in my case)

    link

  12. Do you know if they send 1099-INts or 1099-Miscs ? they dont mention specifically which one. my guess is 1099-INT.

    Thanks

  13. Does anyone know whether I’ll be charged fees when I redeem the money if I have a business paypal account instead of personal?

  14. So far- none of the proprams I’ve explored are available to investors from Alabama- what’s up with that?

  15. I have tried to withdraw money several times and I have not been charged any fees on personal account. I have not tried on business account but someone can probably answer that.

    Paypal allows you to open one business and one personal account so you might want to open a personal account meanwhile.

  16. Really like the idea of setting up a revolving microfinance funding account. I’m going to work on that!

    Still don’t see anywhere here or in the links how microplace deals with defaults. Since it’s a securitized for profit company (not a 501c3), does it not pass on defaults to lenders? I don’t see how it could credit them to you as charitable deductions like Kiva (I’m assuming kiva does as it is a 501c3)..

  17. Well it’s been over a year; what are the results? I’m thinking about trying it out.

  18. Results are good, no defaults for me, and all interest was paid as promised. Have reinvested many of my funds already.

  19. I read where you find investments that pay 5%. In the Midwest I can only find 3% max, most are 2.% or less. I wonder if it matters where you live?

  20. stephen says:

    I’m guessing it depends on the economy. I live in CA and can only find 3%, as well.

    For the record, I got my first interest and principle payment on June 30th. It went straight into my paypal. No problems, and happy with their service so I reinvested.

  21. Stephen
    Thanks and good luck with your investments.

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