“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.
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“The rates paid by actual individuals are not stated, but can be as high as 30%.”
I think it’s wrong when a credit company does it to me, and wish there were a way I could do microfinance without doing this to other people.
Do you know what rates Kiva charges?
At the moment, I only make about 2% on my savings account. If I could get even that rate, I’d be very happy to do so, if I also got the philanthropic benefit of helping fund microfinance loans at a reasonable rate to the people taking out loans.
A 5 or 6% return is very attractive, but I’d rather not have a group of financial middlemen making the 24% difference at the expense of the people taking out these loans.
I’ve been doing Kiva for about 2 years now, and have a good chunk in it; about $600 or so that I just turn over and reloan when it gets paid back. This makes it about $1000 in loans over the 2 years. The thing about Kiva is that big events can impact it. I lost 2 loans to deaths when Kenya had those problems last year. A lot of poor folks were killed, or had their livelihoods destroyed. That is a risk. To me, it’s one worth taking, but I don’t think Kiva should be considered an investment really. To me it’s more of an “investment in society” or even a promotion of capitalism. After all, the aide organizations do collect the interest(10% or less), and we simply guarantee the loan. We take all the risk, and they take(the local aid agency in the country) all the interest for the effort of finding these people, vetting, and managing their payments and helping the person with the loan.
Don’t get me wrong, obviously, I support the idea, I just don’t want folks to be confused about it being an investment. At best, you get your money back. of course, I feel good about it, and believe I am helping build the world economy by helping these people pull themselves out of poverty which in a sense will come back to me. Richer foreigners can then buy more American products, and the cycle goes on. But that’s not something my wallet will see.
anyway, I just wanted to share that one.
To ben.. to answer your question..
on their site…
http://www.kiva.org/about/microfinance/
see section 6 specifically on the list on that page…
Still, the specific answer depends on the aid organization that is supporting the specific loan. You’ll have to go to this page:
http://www.kiva.org/about/partners
then pick a specific partner… such as
Cambodia > AMK
http://www.kiva.org/about/aboutPartner?id=109
and then you’ll see…
Interest Rate Comparison
Average Interest Rate Borrower Pays To Kiva Field Partner
This Field Partner 30.00%
All Kiva Partners 23.16%
Average Local Money Lender Interest Rate
In this Partner’s area 120.00%
Average for All Areas 85.65%
I was wondering when someone would put in place a system like this to provide interest-bearing microfinance projects. Definitely interesting and worth checking out more closely…
Flash to the 60 Minutes piece about well-to-do Americans making money off the backs and hard work of third world citizens paying exorbitantly high interest rates.
I think it is a great idea to help people while receiving a return, but does everyone have to be so greedy in between us and them?
I also use Kiva which appears to be doing the right thing. Getting 4-6% returns on these type of loans from microplace doesn’t seem too appealing. In the present market, I think it’s easier and safer to buy depressed bonds or preferreds.
hador_nyc –
thanks very much!
from what you wrote:
“Interest Rate Comparison
Average Interest Rate Borrower Pays To Kiva Field Partner
This Field Partner 30.00%
All Kiva Partners 23.16%
Average Local Money Lender Interest Rate
In this Partner’s area 120.00%
Average for All Areas 85.65%”
it looks like the 30% interest the microfinance partners charge is MUCH better than the average rate in this area – 120%!
I’ve been thinking about this all day – I really think that there’s a market somewhere for a microfinance company that charges lower interest rates. I suspect they’ve got a good model of risk/reward, but if repayment rates are as high as publicized, they should be able to lower the reates, and still make a profit. I think that would appeal more to people like me, who are likely to participate in Kiva anyway, but view it more as a donation than a business. I wouldn’t mind having the loans be an investment, but don’t want to be exploiting people with what I consider to be excessive interest rates.
Here is a post from the MicroPlace blog that explains why lenders charge so much interest: http://www.microplaceblog.com/microfinance-investment/your-interest-rate-is-what/
When I first read it I was dismayed that they charge so much. I’m sure Kiva charges similar rates. But then I decided to pull my money out of Kiva and put some into MicroPlace at 2% and 3% interest. The point of paying interest is so that microfinance can scale up. Earning interest also covers losses for me.
I’m definitely going to try the 5% rate. I’m sure this rate will result in more money available for loans.
To people with easy access to credit, like we Americans, the the interest rates charged by MFIs are initially shocking.
There are some things to consider.
1) The borrowers are often in sparsely-populated rural areas. Loan officers spend their day traveling from borrower to borrower; this increases cost from an MFI standpoint.
2) Inflation is a problem in many developing countries. Inflation hurts lenders, so a higher interest rate can mitigate this. For instance, Bolivia has an inflation rate of about 11% an MFI on Kiva is listed as having an interest rate of 20%.
3) MFIs need to be for-profit to be sustainable. Microfinance isn’t about charity, but about poverty-alleviation through socially-aware capitalism.
I’ve been a Kiva lender for over 2 years now, and it’s been great. My loan portfolio has a 98% repayment rate (better than my 401k!). I actually like that it doesn’t pay interest; no SSNs or tax worries. I also like that your portfolio can be highly-diversified, and you lend to very specific businesses, instead of being mutual fund style.
Whew!
This stuff always scares me.
First red flag……..
#1.) Beware of ANY investment that claims to return a guaranteed percentage ABOVE the historic rate of inflation.
#2.) Ask yourself (and keep TODAY’S environment in mind)……..what do people looking for this kind of loan have as a tool(s) to allow them to repay at rates such as these and what is the pot of gold at the end of the rainbow causing them to commit to such an agreement in the first place?
There is so much money out there right now with no place to go. I think 2 years ago this sounds better than it does today.
I dunno…….maybe just my spidey sense tingling?
This looks interesting, and I hadn’t seen it before. I like Kiva a lot and consider any money I put in a donation, even though it’s not truly one. If they don’t pay it back, then oh well. They were vetted by other people I trust, and likely, something really bad happened preventing them from ponying up the cash. However, with the mindset of getting back interest, this starts to feel more like Prosper and less like philanthropy, which sort of defeats the whole purpose.
Also, remember that these are not $10,000 loans charging 30% interest. More like $100 loans. If you imagine the cost of servicing – publicizing the loans, visiting the borrower, talking and vetting them, receiving payments, accounting, record-keeping – costs only $10 per loan, that’s already 10% of a $100 loan.
I made 2 loans to kiva last year. I was quite impressed that one of them paid it all back in less than a year. Her electronics store in Nigeria must have took off. The other one paid back for few months and then stopped. I received am email from Kiva saying I should not expect it back anymore. Oh well, lost about $20. I thought of it as charity. If I am okay with loosing thousands of $ on 401k and other investments, $20 is no big deal.
Like Mike said above, expecting 5% (or any %) on micro loan to help poor people defeats the purpose of the loan. These middle men (or women) in these poor countries are probably making a living by taking our money and charging poor people 30% for the loan. Expecting returns on our money to microloan is just perpetuating their abuse of the poor people. I’ll stick with kiva.
btw, does anyone know if Yunus’ Grameen bank charged any interests on their microloans?
The idea of earning interest on loans to the poor is as MicroPlace says, one way to attract sufficient capital to cover the need, which isn’t being met currently. On Kiva’s website they mention rates of 36% being reasonable (see http://www.kiva.org/about/microfinance#6._Why_are_microcredit_interest_rates). I suspect Kiva rates are similar to MicroPlace and Grameen bank rates except that MicroPlace is set up to give a little interest back. One may think earning interest defeats the purpose of microloans but all these microloan institutions are charging high interest rates because that is how the model works.
Currently I have 44 Kiva loans and I have never lost any money. I don’t think Kiva is upfront about the actual interest rates being charged. And I agree, when you find out that they could be 36% and higher you wonder why you are donating in the first place. But apparently these rates are better than the alternative. With some research I may blog about this and perhaps mention alternative ways to help the poor.
Rick, see my comment on Mar 10 at 730AM; there’s where you can easily find what rates each different loan organization linked to Kiva charges. It’s all clear and black and white.
Personally, I think all the microloan options are fine. You want to help out and get nothing back; great. You want a few percent back, that’s fine too. The fact is that a LOT of people need microloans to help them accomplish things. Who cares if the person giving them the loan wants a few % back, or not. So long as they get the loan at a normal rate; 20-40% instead of the over 80% that Kiva shows is the average in the areas they operate, then it’s helping.
I checked on Kiva and their average loan rate is 23.16%. If people are donating to Kiva because they think other MFIs are “defeating the purpose” with their high rates it would be helpful to know that Kiva is charging similar rates. You can of course check the individual rates of Kiva’s field partners.
Who said defeating the purpose?
In Mike’s post he says, “…which sort of defeats the whole purpose”. I don’t think it does because in order to get the amount of capital needed to help all the poor that want loans you will have to pull in investors that want a return. So my point is that Kiva charges similar rates to MFIs that pay interest to the donor.
oops, wrong mike. My real name is mike, and I forgot that I wasn’t using that here.
Actually, i agree with you. Every little bit helps. Even if you do a good thing for a bad reason, you’re still doing good. There is nothing wrong with wanting an incentive. After all, that’s why you can deduct charitable contributions from your taxable income (US anyway).
Very interesting and thoughtful discussion.
I was in Peace Corps W. Africa in ’79-’80 when the first micro lending began. A friend cogently argued that charging market loans to poor people is justified by a) the fact that small entrepreneurs can make a large rate of return on a small abount of capital (think of someone transporting wood or water by hand to sell versus using a cart.) Being able to make the switch is worth the interest rate on a realively small loan and then they have the asset to use for a long time. b) with consessoinal rates, the loan capital is going to be mainly public sector or donations – fine as far as they go but never large enough supply to meet the demand that is out there. So, a while a 0 or 1% loan for the donkey cart would be great, it does no good if there is not enough capital for me to get the loan. I think we color our views with thoughts of high rates (18%!!!) on CONSUMER loans where the purchace actually doesn’t give a return.
I like to think of the change in the world if large amounts of capital could begin to move directly to poor people. Most studies show that women use their earned income on basic necessities for them and their families. WHere do the BIG loans go? To big projects where big people are the main beneficiaries.
My main problem is with interest at all! Its what drives us to a perpetually growing economy, using ever more resources in the process. We need a steady state economy to sustain ourselves and the planet.
I prefer Kiva over Microplace due to greater transparency in the actual rate being charged to the loan recipients and the portfolio yield. Looks like Microplace is a lot less altruistic than Kiva.
I would rather get zero interest with Kiva than allow those arrogant financial alchemists on wall-street manipulate these loans into exotic products and create another global financial mess.
I agree with Bharat above, though I wish Kiva gave a 1% or 2% return, enough that when a borrower doesn’t pay, the money from other borrowers fills the gap. I’m not looking to make money, but just to maintain the money I put in.
If I could treat it like a semi-reliable savings account, I would. Most of my money just sits in the bank, being used by Wall Street tycoons to pad their pockets. If I could plant it somewhere else, where it would be invested in socially conscious projects, without risking the whole thing, that would be ideal.