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.
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If people with money didn’t lend it “for profit” to those that needed it there would be a whole lot less things getting done in the world.
I don’t think a % or two is going to be killing these people its not like a 20% loan and nobody is forcing them to take it or they starve to death. These are mostly people wanting to start or expand their business.
Mr. My Money Blog, I have been playing with Lending club as well. But you make me interested in these other sites. If you had have enough time to really get a feel for each site, could you possibly do a post as to what your experiences, pros/con comparisons, are for each site (from an investor perspective)?
Thanks
While I don’t necessarily disagree with Brad, he should be aware of the facts on microfinance interest rates–they range from 18 to 60%. See MicroPlace FAQs, or below. https://www.microplace.com/learn_more/microfinancefaq
Why are interest rates charged to borrowers higher than I expected?
Lending organizations need to charge interest rates to cover their costs so they can operate as viable institutions that provide services over the long term. Interest rates charged by lending organizations vary by country and range between 18 and 60 percent.³ These rates have to cover the high transaction costs of managing small loans, administrative costs, loan defaults and the costs of borrowing capital to make these loans. While they may seem high, they are often a better alternative to local moneylenders who can charge between 120 and 300 percent.4
Mr. My Money Blog,
Possible answer to your surprise at an A-quality account going south: Job loss in a recession. It adds greater risk to loans. You borrower may have a great credit score….then lose his job……and source of income. Food, house payments, utilities, etc. take precidence over a loan payment. Need to re-evalutate risk in these uncertain times.
The high interest rate charged by Kiva microfinance partner is irresonalble in my opinion.
Example:
Cambodia average Commercial bank prime lending rate is about 16 % in 2008 *. The Average Interest Rate and Fees Borrowers Pay (Portfolio Yield) on Kiva for 2008 is between 35% -40 %.
That ‘s too BIG a difference in my opinion. Ok let’s say the commercial bank charge 16 % well maybe charge 19 or 20 % for the extra risk. But not 35 %. To me it looks like a for profit organization and not a non-profit . Helping is the name of the game and when Kiav field partners are asking for 35 % interest rate when the regular commercial banks in the same country are asking for only 16 % to me that is not normal.
I need to find an organization that offers the same service than Kiva but with interest rates that at least match the commercial lending banks… with maybe an extra fee for defaults ( but with a 98 % non deault rate, the interest rate should be even lower for microfinancing in my opinion since there is less risk involved ) .
If anybody know of a good REAL NON-PROFIT organization that offer that…please let me know .
Thanks
Kevin
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( * referecne: http://www.cia.gov/library/publications/the-world-factbook/rankorder/2208rank.html )
Kevin,
I think you are simplifying lending a little too much. While the PRIME lending rate in Cambodia is 16%, the MICROFINANCE lending rate is probably much higher. Comparing the prime lending rate and the microfinance lending rate is like comparing apples and oranges. The prime lending rate is for large businesses with credit histories and actual assets that want to take out large loans while microfinance is for poor individuals who have never had a loan before borrow $20. There is a much greater risk in lending to the individual than an established company. It’s like saying that I should be lending money to some random hobo (high risk) at the same interest rate as the US government (which has never defaulted).
Andreas
Andreas
Sorry, but your argument completely misses the point. The reason you quote is that Microfinance Lending has to charge twice that of Prime is because its a lot more risky to lend to these small time borrowers.
The point is that I take 100% of the risk and lend the money at 0% interest. When I lend money via Kiva, I do not expect to see it back because I know I am doing it for a good cause.
So making the interest justification based on risk is completely irrelevant.
I lend via Kiva to lift someone from poverty. No one can be lifted out of poverty by being charged 40% (or even 50, 60% is some cases via Kiva). The best of business cant make that kind of returns, let alone a poor street vendor.