By Carla Thornton
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Vin Ron, a farmer, and her husband, a fisherman, struggled to feed their five children on $5 a day in Cambodia. Their fortunes changed when Vin applied for a $600 microloan from Kiva. Vin used the money to buy seeds and fertilizer to produce a bigger crop of rice and vegetables to sell to her community. She even had enough cash left over to branch out into raising piglets.
Traore Lozouhon of Cote D’ Ivoire, a small country in West Africa, applied for and received a microloan of 2000 euros from MISCOCI, a consumer union that partners with the microlender MYC4. The unschooled father of three used his loan to expand the inventory of his convenience store and attract more customers. |
Felicita, a single mother of two living in Paraguay, barely made enough selling clothes in an outdoor market to keep her kids in school, so she applied for a $400 loan from Fundacion Paraguaya de Cooperation y Deserrallo, a partner of microlending broker MicroPlace. With her small loan, Felicita bought household products she now sells out of her home, saving stall rental in the market. Once she has repaid that loan, she plans on taking out a second to expand her stock to include basic foodstuffs like flour and sugar. With only a few hundred dollars loaned by sympathetic strangers, Felicita is on her way to ensuring a more stable life for her family.
Micro loan investments, big ripple effect
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Looking for a small investment that will make a really big difference in someone’s life? Think microloan, the older, more socially conscious version of loans made today on sites like Prosper and Loanio.
Like modern social loans, microloans are small loans made to individuals by lenders who are not a traditional banking institution. Unlike the typical Prosper loan, microloans are targeted at the very poor. When you make a microloan, it won’t be to help a middleclass Joe who needs $10,000 to consolidate credit card debt or upgrade the kitchen. Microloan recipients are usually struggling third-world mothers hoping to buy more raw materials to start or grow a one-person business. |
Until recently only financial institutions and high-income individuals could invest in microloans. In the last couple of years, microlending has made the leap to the person-to-person lending model used by sites like Prosper. Now anyone can sit down at a computer and invest in a poor microentrepreneur living halfway around the world through MyC4.com, Kiva.com or MicroPlace.com.
These three sites partner with local microfinancial institutions that find, screen and manage microentrepreneurs in their respective regions. Once a loan’s full amount has been raised through the microloan site, it’s sent to the MFI who distributes it to the borrower. The MFI then collects payments and funnels them back to the operators of the site, who repay the lenders in monthly installments.
Not a get-rich-quick scheme
With 3% interest rates at most, none of these sites will make you wealthy. Moreover, Kiva and MyC4 loans are unsecured, which means if the borrower skips you won’t get your money back. Add unpredictable fluctuations in exchange rates, and a Kiva or MyC4 microloan might seem like a bad investment no matter how much you want to do good.
In Kiva and MyC4’s favor, default rates are low compared with mainstream social lending sites’; in June, for instance, Kiva reported a default rate of only .3 percent. Plus loans are repaid within six to 12 months, compared with three years for most social lending site loans.
Kiva and MyC4 offer one major advantage over MicroPlace as a way to socially invest: you can direct your money to be loaned to an individual of your choosing.
In the end, funding a guy on Prosper with a self-inflicted credit card problem might bring a bigger return – but investing socially on one of these three sites might bring you more personal satisfaction. Here’s how they shake out.
Oprah’s pet
If the name Kiva (agreement in Swahili) rings a bell, you can probably thank Oprah. When the talk show hostess/one-woman PR juggernaut gave Kiva founders Matt and Jessica Flannery her on-air blessing last year, so many lenders registered at the site that Kiva briefly ran out of microentrepreneurs to help.
Not-for-profit Kiva currently pays zero interest but this will change next year, according to Kiva’s public relations director Fiona Ramsey, who says Kiva’s partner lending institutions in the field will share part of the interest they collect, probably a nominal amount similar to MicroPlace’s 3 percent rate.
Lending money to a Kiva microentrepreneur is as easy as browsing a list and clicking on your choices to add them to a shopping cart. You can see Kiva’s entire list of applicants at once or filter based on region (43 countries in all), business type or even gender. The minimum loan amount is just $25.
Like MyC4, Kiva encourages lenders and borrowers to develop personal long-distance Internet relationships to cement the special bond being created by the microloan. When registering you have the option of creating a detailed lender profile.
Kiva might not pay interest right now, but when it does, it should be one of your most attractive choices for socially responsible investments.
MyC4 explodes with potential
MyC4 currently is the least broadly appealing of the three, and not because it’s named after a plastic explosive (C4 also stands care for, according to the site). Launched in May 2006, it’s the second oldest of the three but still in beta operation and makes loans only to microentrepreneurs in six African countries.
Unlike Kiva and MicroPlace, who cater to the poorest of the poor, MyC4 helps microentrepreneurs who already have fairly well-established small businesses but need additional funds to thrive.
Currently MyC4 is not fully open to North Americans, who can invest but not withdraw money. This troublesome restriction might change in 2009, according to MyC4 representative Alette Heinrich Pramming, when MyC4 plans to expand beyond Europe.
If MyC4 does fully integrate North American investors, it could rival Prosper as an alternative social investment. It uses a Dutch auction system of loan bidding similar to Prosper’s where multiple lenders vie to fund a loan and the lowest interest rates win. However, unlike Prosper, the winning bidders receive the interest rate they bid. So if you make the final cut, bidding higher can actually pay off.
Guaranteed microloan investments for the masses
A wholly owned subsidiary of eBay, MicroPlace is the first online brokerage to let individuals invest as little as $100 to help the working poor. Currently MicroPlace’s intermediaries, who partner with the lending institutions in the target regions, help microentrepreneurs in 29 countries including the United States.
You can’t choose specific individuals to invest in at MicroPlace. Instead, you choose one of MicroPlace’s lending partners in a country or region you would like to help. Still, the site has the look and feel of a social lending site thanks to profiles of borrowers who have been helped by the lending partner and a calculator that shows how many loans on average your contribution will fund.
You can view all the investment opportunities at once or by country, level of poverty or financial return. Choosing a country takes you to a page with a short description of the region and a list of investments, each flanked by a sample borrower to give you a feel for how your investment will help. Included is the interest rate -“ up to 3 percent but usually less – and loan duration.
For those who don’t have a lot of money to invest or don’t have the time to comb mutual funds for socially responsible investments, MicroPlace makes it easy, safe and affordable to help the working poor.
Which microloan site is best for you?
If making a guaranteed profit while helping a poor working person is paramount, choose broker MicroPlace. However, if Kiva delivers on its promise next year to pay interest, it could be the best combination of profit and personalization. When MyC4 allows U.S. investors to participate we’ll be revisiting this promising microloan site as well.
So get out your pocketbook now; eager and deserving microentrepreneurs around the world await your kind assistance.
Learn more about the history of microlending..
