A new microfinance site just went live (Microplace) and it bears some similarity to Kiva, but with some important differences. I thought I’d outline those differences and point out that both offer an opportunity for ordinary people of privilege like ourselves to make a huge, sustained impact on the lives of the “working poor” around the world.

In a nutshell: Kiva is more personal, and some would say more interesting. Microplace, on the other hand, is safer and allows for larger, hassle-free loan-making. There’s a place for both. Kiva has made over $14 million in loans, already, breaking ground for average people to consider microfinance as part of their investment portfolios. It has connected tens of thousands of people all over the world who would never have any interaction, otherwise. Microplace, on the other hand, has the potential to grow the market enormously. Kiva’s $14 million (and growing exponentially) is nothing to sniff at, but Microplace could bring in many orders of magnitude more.

A potential Kiva investment

A potential Microplace investment

I have a longer explanation, after the jump; click through to read on.

I encourage everyone to try out Kiva and Microplace, as both make it really easy to invest. I’ve signed up for both, in fact, and will be putting a chunk of change in each. In a year or so, I’ll report back on my experiences.

First, a quick note on microfinance. This is a way for people around the world to access global capital markets. The average loans are tiny (say, $50-$200.) This seed money produces real value. A propane refrigerator allows a street vendor to keep food fresh for a week instead of a day, allowing for bulk purchases and the ability to handle sales volatility. A mobile phone allows a farmer to negotiate prices at several different markets before committing a days-long journey to any one of them. There are endless examples.

Microfinance institutions have been around for decades. The recent innovation has been to allow individual investors to add their resources directly to the pool. Kiva was one of the first. Go to their site, and you’ll find long lists of individual requests for loans, complete with a photo of the loan requester and the terms of the loan. For example, here’s Alice, a woman who needs $125 to buy clothing for her retail stand, repaid monthly over the next three months. Default rates are incredibly low: 0% for may field partners.

I could lend her $50, say, and in three months that money would be back and ready for me to loan again. If I’m “donating” anything, it’s the interest that I might be earning elsewhere. Since I’m a lazy investor, that amounts to very little. I might divert some funds from funds from my checking account, which earns no interest, or from my Orange account, which gets less than 5%. Think about this: If I’m willing to make a donation of $100 to charity, for example, I should in theory be willing to make the equivalent loan of $2000 for a year.

As you can see from Alice’s profile, Kiva allows investors to develop a personal connection with those they lend money to. This system has its disadvantages, though. Loaning individual-to-individual might be risky, depending on the borrower; defaults might be rare, but if it happens to you, then you’re out of some cash. More importantly, it can be tedious if you want to make a lot of loans. Let’s say you’re someone (or a foundation) who wants to roll in with $100k in loans. That’s a lot of clicking around on the website.

The new (Microplace) site addresses these issues, at the expense of being less personal. Kiva gives investors this direct connection by working directly with “field partners”" in the areas they serve. These field partners might manage only a few hundred loans in a small geographical area, and they can provide photos and descriptions of all of their borrowers. Microplace, on the other hand, ties into the system at the level of microfinance institutions (MFIs) which are a step (or more) above the field partners in the microfinance food chain. This means that a) the risk of default is spread out and b) Microplace can handle much larger loans, with ease.

There are other major differences, too. Microplace is new eBay subsidiary, with all of the regulatory chops and financial might of its parent company. As a result, they’ve been able to become an actual for-profit lending institution that pays its investors interest. Kiva wanted to do the same, but didn’t have the resources to navigate the SEC red tape. By aggregating loans for the end consumer, Microplace is also able to guarantee your interest.

One last difference is that Microplace seems to have loans with much longer terms (2-3 years, at 2%-3% interest.) There’s nothing in that business model that would seem to require that investors tie up their money for such long periods of time, so I’m not sure what they’re thinking. It’s a major reason to go to Kiva, instead.

[Note: There's also a good comparison of the sites at Worldchanging blog.]

Related Posts:

• house of cards (April, 2006)
• HASA (June, 2008)
• China-Congo Lovefest (September, 2007)
• Something very unusual in here… (October, 2005)
• Social Costs (November, 2007)

This entry was posted on Tuesday, November 6th, 2007 at 12:17 pm and is filed under economics, profit, society. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.