By WSJ Staff
Dr. Muhammad Yunus
Dow Jones Newswires’ Shelly Banjo on trends in microlending.
It may be micro, but it’s still lending.
Credit markets world-wide are tight, and charitable donations are down. But Web sites that specialize in “microlending” — small loans mainly to the working poor — say they’re thriving as they address both issues. They’re doing it by allowing people who want to do good but are strapped for cash to lend instead of give.
Microloans, which generally range from just $100 to $1,000, typically go to poor entrepreneurs in developing countries. They use the money to fund small businesses — a seamstress who needs a new sewing machine, for example — that pay off the loan out of their increased revenues. Until relatively recently, microlenders have largely been community-focused financiers such as the renowned Grameen Bank of Bangladesh — which, along with founder Muhammad Yunus, was awarded the Nobel Peace Prize in 2006.
Microloans are appealing right now, because they don’t cost you anything.
At Kiva.org. which emerged in 2005 to become the leading player in online micro lending world, the bad economy is attracting more donors to the idea of an affordable, effective donation, says Kiva spokeswoman Fiona Ramsey. Kiva is also providing a source of credit to brick-and-mortar microfinance institutions at a time when other lending channels are starting to dry up, she said.
At Kiva, lenders sign up on the site and choose an individual to lend to, such as a Peruvian entrepreneur starting a local basket-weaving business or livestock farm. You decide how much you’re willing to loan ($25 and up) and within 6-12 months, you get the money back in full. Lenders can use their money to help individual entrepreneurs become economically independent and in the end, get the money back. From there, lenders can either funnel the money into another loan or return it to their bank account.
Kiva almost doubled the amount of new, active lenders from 204,000 in 2007 to 404,000 in 2008. Since 2005, Kiva members have lent more than $58 million to more than 83,000 entrepreneurs; in 2008, the site arranged about $40 million in loans. Each Kiva lender makes an average of 3.67 loans. The current repayment rate on Kiva is 97.5%, meaning entrepreneurs have defaulted at a rate of 2.5%. Read some of Kiva’s
success stories here.
Tightened credit markets in the U.S. have made Americans more sympathetic to entrepreneurs elsewhere who are having difficulty accessing credit, says Kiva’s Ramsey.
Microfinance investment site MicroPlace.com. a subsidiary of eBay Inc. has another way to attract lenders: steady returns that match, or even beat, the bank. Fixed-income investors looking to use their money for social good are seeing returns on microfinance investments that surpass those of money market funds and certificates of deposit.
MicroPlace is a registered brokerage firm — unlike Kiva, which is a not-for-profit organization — so lenders can earn a return ranging from 1.25% to 3% on their loans. (According to company founder Tracey Turner, that’s soon to be up to 5%). Given that the average return on a one-year bank CD is about 2.25%, that’s not too shabby.
MicroPlace investors can open an investment account (just like at Charles Schwab or any other broker) with as little as $20. But there’s one caveat: investors are only able to choose which microfinance institution to invest in, such as the Habitat for Humanity Investment program or international microfinance organization Accion. not the individual entrepreneur. You can also choose when you get repaid, with terms ranging from three months to five years.
Recently, MicroPlace introduced a number of investments that allow you to redeem your money at any time. Loan interest starts accruing from day one and lands in your bank or PayPal account quarterly. After your investment reaches maturity, you can reinvest your principal in another loan but MicroPlace doesn’t offer its clients the ability to reinvest interest.
The idea of microfinance emerged from the idea that there aren’t enough donation dollars to satisfy the needs of the working poor. Microcredit is designed to empower poor individuals to become business people rather than charity cases.
At MicroPlace, this idea is extended online so individual investors with limited cash can still participate. Although investors aren’t technically giving to charity — and thus cannot claim these donations on their taxes — they are still using their money for a social good.
“MicroPlace attracts investors who don’t want to compromise returns but want to use their dollars in a way they can feel good about,” says Turner, who estimates MicroPlace has enabled more than 33,000 loans.
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