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Microfinance: Now Anyone Can Lend to Kenyan Shopkeepers

Last week, eBay launched MicroPlace—a site for individuals who want to invest in microfinance institutions, which make small loans to shopkeepers and others in developing nations.

MicroPlace is built around the “teach a man to fish” philosophy, rather than the “give a man a fish” approach of charities where you simply give your money away to the needy.

Here’s how it works:

1) You go to Microplace’s web site and pick a microfinance organization – not an individual borrower in a specific region
2) You invest a minimum of $100 in the organization
3) That organization pools money (from you and others) and then lends it to local borrowers. It decides on its own what interest rate to charge the borrowers.
4) The institution collects all loan payments from the borrowers. Once it does, you get a return on your original investment

This type of investment won’t make you rich—the interest rates you can earn currently range from 1.5% to 3%. MicroPlace is likely to appeal to those who can’t afford huge charitable contributions but would like to make an investment that’s also altruistic.

We spent a few hours evaluating the MicroPlace site this week. Our findings after the break.

Things We Like:

• You can compare investments by interest rates (paid to you) and historical loan repayment rates (the percentage of loans that borrowers have repaid in full with interest to the lending organizations.)
• There are viewable financial statements, which tell you everything about an institution from its cash on hand and where it’s stored to how much it spends on photocopying and printing.
• A good explainer on what microfinance is and how it works
• You need only $100 to make an investment.
• Customer service answers within seconds. They even call back to follow up (how sensible and rare!).

Things We Didn’t Like:

• No explanation of what sort of interest the borrower will pay to the institution that’s using your investment to make loans (Turns out it’s between 20% and 60%, according to MicroPlace founder Tracey Pettengill Turner, who spoke to us after we poked around the site. These rates are much lower than what the local loan shark might charge.)
• Not enough specific information on what MicroPlace is doing with your social security number, which the site says it needs “to verify your identity and for tax reporting purposes.” (MicroPlace does use it to access your credit file, but its inquiry isn’t the type that affects your credit score.)
• Not clear if you’re guaranteed to earn the interest Microplace advertises — or even certain to get your original investment back (There is no guarantee, but microfinance institutions have reserve funds in place to protect investors if too many borrowers don’t pay their loans back — something that’s rarely a problem.)
• You don’t have the option to lend all of your money to one borrower; instead it gets broken up and lumped in with other loans that a particular microfinance institution gives out. (MicroPlace does this because it believes it makes the lending process more efficient.)
• So far, only a few countries in Africa, Latin America and Southeast Asia have organizations represented on the site.

So MicroPlace doesn’t produce a huge return, but it will help you do some good and earn a bit of money in the process. If you’re looking to earn a high return while lending to (American, so far) individuals, companies like Prosper and Lending Club offer better platforms, as they let you charge higher interest rates to borrowers.

For those seeking to funnel donations or no-interest loans to specific individuals, organizations like DonorsChoose and Kiva let you read personalized appeals from individuals and pick the ones you want to support directly.

Tomorrow, we’ll have a roundup of these sites plus a few others that offer similar microlending, microgiving and microfinance opportunities.

– Irina Aleksander