Kiva

Microfinance Goes Bad in India

January 26, 2011 By Peter Renton 10 Comments

The microfinance movement began in south Asia when Muhammad Yunus started Grameen Bank in Bangladesh in the 1970’s. He was awarded a Nobel Prize for his efforts in helping bring women out of poverty in that country. It has been a successful experiment in social lending extolled by the likes of Bill Clinton, Kofi Annan and many other world leaders.

These days, however, microfinance is starting to lose its luster. In the last month there have been several news stories on the dark side of microfinace. There was this story on NPR, the New York Times and Vator.tv and many others. The basic problem is this. The interest rates charged by lenders in these countries are exorbitant and they are given to poor people who typically have little or no business experience. It has become a huge business, particularly in India, run by large corporations focused on short term financial results. Sounds like a recipe for disaster and that is what is happening. All this negative news prompted this response from Yunus in the New York Times last week.

In the Indian state of Andhra Pradesh, home to 75% of the microfinance companies in India, the state legislature has passed a new law that will likely send most microfinance companies out of business. Of course, like any industry there are many reputable companies that have been caught in the crossfire, and there have certainly been many success stories. But with many women being driven to suicide because of their mounting debts something had to be done. [Read more…]

Help People Help Themselves With Kiva

December 27, 2010 By Peter Renton 2 Comments

In our family this is the week we always do some charitable giving. This last week of the year is the perfect time to ramp up your donations so you can still take them as a deduction on your 2010 tax return. If you leave it until next week then you will not be able to deduct your donation until you do your 2011 taxes.

This year we are also including Kiva as part of our year end donation program. Kiva is the leader in the non-profit segment of peer to peer lending known as micro lending. Kiva provides interest free loans to predominantly female (around 82%) entrepreneurs in third world countries. These are often people that have no other way of raising money and without Kiva might never get their small business started. [Read more…]

Microloan Comparison Chart

December 7, 2008 By Peter Renton Leave a Comment

Microloan facts: Kiva, MyC4 and MicroPlace
	Kiva.org	MicroPlace.com	MyC4.com
Launched	November 2005	Summer 2006	May 2006
Who can become a lender?	Anyone	U.S. residents only	Anyone; however, North Americans cannot make withdrawals
Average interest rate for lenders	Zero	2 percent	12.80%
Lender can request specific interest rate	No	No	Yes
# of borrower countries	42	29	6
Value of loans processed so far	$45,714,935	not available	4,805,196 Euros
# of loans funded	64,073	47	2577
Current repayment rate	98.64%	100%	91.30%
Current default rate	1.36%	0%	0.72
Current # of borrowers	310,655	not available	2899
Percentage of loans made to women	77.70%	not available	not available
Average size of loan requested by borrower	$458.36	not available	1,766 Euros
Average amount loaned	$132.37	$135	not available
Loan duration	6-12 months	not available	4-36 months
Current # of lenders	345,200	not available	8,378
* As of October 9, 2008

Saving the World, One Micro Loan at a Time

November 23, 2008 By Peter Renton Leave a Comment

By Carla Thornton

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

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..

Which Social Lending Site is Right for You

November 23, 2008 By Peter Renton Leave a Comment

By Vivian Wagner

A general guide to person-to-person lending sites

Choosing the right social lending site depends on your needs, and what kind of borrower or lender you are. Do you have stellar credit – or not so much? Must you have the highest possible interest rate, or would you be just as happy making a smaller return in order to help a one-person business in a third-world country?

Whatever your social lending goals, there’s probably a site out there for you. To help in your search, here’s a quick overview of the major players.

General purpose
Prosper.com, LendingClub.com and Loanio.com are for the most part designed for stranger-to-stranger transactions, which means almost anyone can sign up to lend or borrow. All three facilitate loans between $1,000 and $25,000 for a variety of purposes, including auto, business, debt consolidation, friends and family, home improvement, military, and student and school loans. Both charge roughly the same fees. However, the LendingClub favors lenders, whereas Prosper and Loanio are much better choices for most borrowers.

Prosper.com

Launched in 2006, Prosper, the largest mainstream social lending site in the U.S., operates on a bidding system similar to eBay’s. Borrowers post profiles of themselves designed to attract lenders, and lenders bid on the loans, with the lowest bids winning a chance to fund the loan. Almost any borrower, no matter how shaky his or her credit history, can post a profile on the site, and if the loan isn’t funded the first time, they can try again.

LendingClub

Based on Facebook, LendingClub is a relative newcomer to the P2P business, but it has quickly gained a foothold since its 2007 launch. Unlike Prosper’s bidding platform, LendingClub uses proprietary software to match lenders and borrowers based on common interests. It has high standards for borrowers, who must have a minimum FICO score of 640 and a debt-to-income ratio of less than 30 percent. The site is currently in a quiet period while registering with the SEC and is not accepting new lenders, though borrowers can continue to apply for loans. The site’s relaunch date for lenders has not been announced.

Loanio.com

October-launched Loanio might be wet behind the ears compared with Prosper, the other auction-based social lending community, but Loanio is already making waves with some intriguing new features designed to help borrowers with bad credit. One is a cosigner option. Another option releases a loan when funding reaches 35 percent, eliminating the problem many borrowers have attracting enough lenders to fund the entire amount requested.

Friends and family: Virgin Money USA
Thinking of hitting up a pal or relative for money? Then there’s only one real social lending site to consider: Virgin Money USA.

Known as CircleLending until airline and record industry mogul Richard Branson bought it in 2007, Virgin Money USA is one of the oldest social lending sites. Virgin Money facilitates and documents personal, business, real estate, and student loans between friends and family members. Its big plus: borrowers don’t have to qualify. Just pick up the phone and call the toll-free number or fill out an online form with terms you’ve already agreed upon with your personal lender.

Some mainstream sites, including Prosper, have friends and family sections, but the loan process isn’t much different from stranger-to-stranger lending and probably overkill for what you need. Virgin specializes in people who already have a loan amount, term and interest rate lined up with an individual they know. The fees are highish, but Virgin can make the transaction easy, convenient, and free of much of the awkwardness that usually accompanies borrowing money from your dad or best friend.

Guaranteed Loans
In general, social lending is at your own risk. However, for lenders desiring assurance that they won’t lose money, there are a handful of sites that offer guaranteed returns. The tradeoff? Lower interest rates or longer terms.

Fynanz.com

The student-loan site Fynanz.com offers lenders partial to full guarantees of the original loan amount, depending on the Fynanz Academic Credit Score (FACS) assigned the loan. The proprietary FACS scoring system that Fynanz uses rates loans based not just on credit scores but also on factors like the student’s GPA, course of study, school, class standing, and year of study. Loan guarantees range from 50 percent to 100 percent of the loan.

MicroPlace.com

The investments ” not technically loans ” that you make through this globally-aware microfinance firm have a guaranteed, up-front interest rate, so when you send in your money you know exactly what you’ll be getting in return.

Zopa.com

Founded in 2005 and with operations in several countries, including Italy, Japan, the U.K., and the U.S., Zopa offers U.S. investors federally-insured CDs that are used to lend money to borrowers. (In order to take out a CD, a lender must donate part of the interest to a Zopa borrower.)

Helping the Poor
If you want your money to help a grocery store owner in Afghanistan or a restaurant co-op in Africa, you might want to turn to one of the sites that specialize in microloans.

Kiva.org

Kiva links good-willed lenders with borrowers from third-world countries who need loans to buy animals, equipment, store supplies, or other goods for their businesses. Lenders earn no interest, so it’s best to look at loans through Kiva as charitable investing. (It’s also a nice educational tool if you enjoy learning about other countries.) As your loan is paid off, you can withdraw the money through PayPal or reinvest it.

MyC4

Founded in 2006 and based in Denmark, MyC4 raises capital for entrepreneurs in Africa. So far, 3,500 investors from 53 countries have loaned money to over 1,000 businesses in Kenya, the Ivory Coast, and Uganda. At this time, however, MyC4 doesn’t fully serve North American investors, who cannot withdraw money from their account once they invest it.

MicroPlace

Founded in 2006 and owned by eBay, MicroPlace is an investment firm that looks like a social lending site. Lenders invest money through security issuers listed on the site, and these funds are then invested in specific microfinance projects. Although not a social lending site, MicroPlace highly resembles one with profiles, narratives, and photos of borrowers.

Institutional Lenders
This social lending site focuses on serving institutional lenders, who partner with the site to offer borrowers competitive loans.

GlobeFunder

GlobeFunder offers what it calls “Direct-to-Consumer or D2C” loans and microfinance loans. Borrowers can borrow up to $25,000 in an unsecured loan. Lenders at the moment are limited to institutional lenders, but the company is preparing to launch an individual lender platform.

Student Loans
Many students are turning to private loans to fund their education, often as a supplement to governmental loans. Fynanz.com and GreenNote.com specialize in student loans. Virgin Money offers a special brand of family-backed student loan.

Fynanz

Fynanz offers a loan auction marketplace similar to Prosper’s. Students post profiles and request their desired loan amount. Fynanz assigns the loan a Fynanz Academic Credit Score (FACS) based on factors including the student’s GPA, course of study, and school, and then opens the listing to bids from lenders. Bids ultimately determine the interest rate.

GreenNote

Brand-new GreenNote, launched in June 2008, uses a students’ social network to pay for college. Students post their loan requests and then contact potential lenders – friends, family, community leaders, and anyone else in their extended social network – to help fund the loan.

Virgin Money USA

As with its “family and friends” loans, Virgin’s student loans are agreements made offline between a lender and borrower and brought to the table for Virgin to document and service with automatic electronic payments. That means a student loan can be as flexible and have interest rates as low as the lender (usually mom, dad or another relative) will allow. Rates can be below market and the payment schedule flexible to the point of long deferments or complete forgiveness, at the lender’s discretion.

Virgin offers lots of helpful guidance and advice such as its “œlender blender” calculator for students using P2P loans as a supplement to scholarships, grants, and federal loans.
The Student Payback program lets students borrow from the same lender up to 10 times over the course of their studies for one servicing fee, handy for parents who would like to make multiple loans to their student over several years’ time. The downside: Virgin doesn’t service loans made up of money from more than one source. In other words, your aunts, uncles and friends can’t pitch in, too, and receive monthly individual payouts from Virgin.

Finance Gets Personal with Social Lending

October 22, 2008 By Peter Renton 1 Comment

What is social lending? It’s a new take on an old concept. Social lending sites (sometimes also called peer to peer lending sites) are online marketplaces where individuals can borrow and lend money to each other. Social lending has taken off in the last couple of years and could become a major source of loan money thanks to our shaky economic times. After an initial industry shakeout due to SEC concerns, two leaders have each now facilitated over $100 million in loans, while several specialized companies are also demonstrating noteworthy growth.

Social loans offer something for everybody. For borrowers, interest rates are usually much lower than a bank charges. Reasons for borrowing range from business funding to vet bills to weddings, the most popular loan purpose is debt consolidation. With rates often below 10%, it’s no wonder that borrowers are flocking to social lending sites to refinance their costly credit card debt!

For lenders, interest rates are quite a bit higher than they can earn via certificate of deposit or many other fixed income investments. Then there’s the personal element. Many lenders like the idea of helping others while earning a better-than-average return, and sometimes even strike up online or even real world relationships with their borrowers! Lenders can usually invest as little as $25 into a single loan, giving them ability to easily diversify their risk and create a portfolio that cuts across different geographies, loan purposes, risk ratings, and rates.

While social lending is more established in Europe, the concept is now entering its fourth year in the United States with two market leaders beginning to emerge. Lending Club has facilitated more than $100 million worth of loans and has attracted substantial investor backing, having raised $53 million from leading venture capital firms. Meanwhile, rival Prosper.com is approaching over $200 million in originated loans and has its own $40 million war chest to fund future growth. Prosper built a substantial market share lead over Lending Club and other early market entrants, but was forced to suspend lending for much of 2009 due to SEC concerns over the issuance of unregistered securities. Both companies are now compliant with the SEC, but Prosper’s break from loan originations enabled Lending Club to grab a large market share lead. The battle between these two competitors will be interesting to watch!

Social lending can come in a few different flavors as well.

Virgin Money, part of Richard Branson’s Virgin empire, is not a marketplace but instead helps groups of friends and family structure loans amongst themselves. If a borrower and lenders have already agreed to create a loan, Virgin Money makes it easy to create loan documents, calculate interest and even make and track payments. For as little as $99, you can help avoid the friction that sometimes occurs when friends and family do business with each other.

As the student loan market in the United States continues to be in a state of upheaval, several social lenders have stepped in to help fill the void. People Capital has developed a unique proprietary credit scoring model for students with little or no credit history and is slowing building up its origination volume. Green Note helps arrange and manage student loans amongst a student’s friends and family. It aims to make it easier and less risky for a student to arrange education finance from the people that they already know.

Finally, Kiva is a thriving marketplace that offers a different take on social loans. It aims to help entrepreneurs in the developing world raise small sums of capital that they desperately need to grow their businesses and improve their lives, while also providing a profit to lenders. Kiva utilizes field partners around the globe to identify worthy projects, such as money for a farmer to buy a new plow or a seamstress to purchase a new sewing machine. Kiva facilitates the entire transaction and aims to return a profit to its lenders, though many lenders choose to donate their earnings back into the Kiva community. Kiva is generating substantial loan volume, totaling over $130 million spread across more than 180,000 loans!