Rethinking aid to Haiti : An argument for work

The outpouring of charity and aid to Haiti from official government efforts to citizen micro-donations via mobile phone to volunteer web developer Crisis Camps is a powerful testament to human care and outreach in the face of suffering. Recently though I heard a story that I found quite troubling: A friend recounted that his father's long-time business in Haiti is struggling mightily now that the US government response is in full swing. This would not be so shocking post-crisis, except two of this business's core products are buckets and paint, two goods in extreme demand in country right now. The problem? Not only are donated supplies flooding the market, but companies like Home Depot are allowed to mass import their products now tariff-free, significantly undercutting the local businesses.

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Five things to ask yourself if you are interested in social lending

There is significant buzz around the concept of social lending these days. From the dramatic re-opening and prompt re-closing of Prosper Marketplace, to the calm (and dare I say bank-like?) steady returns of Pertuity Direct, mainstream borrowers and lenders across the spectrum are wondering whether social lending may be a legitimate pursuit. But who is it for? Is it an alternative reliable source of returns for investors? An option for borrowers who seem to have no other options? A platform to lend to the working poor around the globe? A risky, high-payoff avenue for lenders? A way to feel good about helping people reach goals that you support?

The truth is that social lending is an incredible diverse market space. If you’re thinking about entering the social lending sphere, ask yourselves these questions to know which platform may be right for you:

1. What originally drew you to social lending? I see three main classes of people interested in social lending: 1) Investors looking for an alternative return stream; 2) Idealists looking for a concrete, high-impact way to contribute to social good; and 3) Casual lenders intrigued by the possibility of cutting out the bank to earn returns and create a more transparent financial experience. You should know immediately which type you are—investor, idealist, or casual lender—and your options will narrow considerably based on these goals.
2. How much personal connection are you looking for? As the term “peer-to-peer lending” has evolved to the broader “social lending”, some sites are moving away from the direct p2p connection. Pertuity Direct, for example, has very consciously tried to move to the mainstream lending market by relegating the typical “borrower profile” to an optional community page. Instead, lenders buy into a pool of borrowers of a given asset class. This approach is excellent from an efficiency standpoint—no need to browse through profiles to try to create your own diversified portfolio—but the lenders looking for the feel-good sensation of getting to know your borrower will be disappointed. Lending Club offers the more traditional profile-browsing approach which gives you a direct connection to your borrowers. On Kiva and Microplace, you choose a microfinance institution who finds individual micro-entrepreneurs according to filters—in your chosen country, target demographic, etc.—whereas on LendforPeace, the entrepreneurs are all Palestinian. Through Virgin Money, you simply formalize deals with people you already know; no new relationships are gained, rather the site creates the framework to help prevent existing relationships from deteriorating when they are complicated by a financial bond. The latest entrant Unithrive connects Harvard alumni with current Harvard students – the possibility for a durable bond between individuals is there with both the financial and university connection.
3. How much risk are you willing to take? Initial challenges with high default rates when the p2p lending space was in its infancy led to many charges that borrowers on these platforms are an adversely-selected population and lending is risky business. The industry has made great strides since then and has instituted far more stringent borrower requirements, but the risk factor is still relevant. Pertuity Direct and Lending Club are the only two companies that are registered with the SEC, so if the government’s blessing matters to you, your options are quite limited. The international microfinance sites have very low default rates (1.7% on Kiva). Pooled lending, like on Pertuity Direct, achieves the highest rate of diversification, but if you’re willing to accept the risk, you can choose borrowers paying a higher interest rate based upon their profiles at Lending Club. Prosper is still shut down, but many early lenders were burned on the site – often due to their own lack of judgment, but an issue nonetheless.
4. Do you want to make money? At Kiva and LendforPeace, p2p microfinance sites, you earn no interest, but the sites offer a high-impact way for you to park additional money (as little as $25). At Microplace, you can earn up to 6% interest (although most investments fall more in the 1-3% range). At Pertuity Direct, the average interest rate is around 13.4% (minus fees). Lending Club claims a 9.05% average annual performance.
5. Are you interested in a particular cause? Many sites target very niche markets. If you are appalled by the usury of payday lending, check out alternative Yadyap (“payday” spelled backwards). Passionate about education financing? Look into People Capital or Unithrive. If you are looking to provide economic opportunities in Palestine, LendforPeace is your site. To help mainstream American families, Prosper and LendingClub are the best known.

A free market approach to transforming international development

Drip Irrigation in Sri LankaWe have covered a number of emerging market-based approaches to charitable giving: p2p microfinance, social lending, and prediction markets.

Acumen offers another essentially free market solution to charity: patient capital. Integrating principles of investment banking into traditional donor-based charity, Acumen is seeking to transform the western world's approach to development.

The fund collects money from donors much as a traditional charitable outfit, but then rather than purchase food, mosquito nets, etc. it lends to or invests the funds in local ventures that provide broader social benefits such as internet cafes or irrigation companies.

This approach is much like the Kiva or Microplace model, but writ large. Rather than a p2p connection, Acumen enables direct entrepreneur lending on a much greater scale. Instead of helping a woman with a $500 loan to expand her small livestock business, like on Microplace, through Acumen, you can contribute to a $1.5 million investment in Mumbai to expand the city's ambulance fleet. Acumen also is painstaking in its analysis of exactly where the money goes and the social value that it brings.

In an interview with the Economist, founder Jacqueline Novogratz explains why she believes now is the time for this type of innovation in international development:

“The financial system is broken, yes, but so too is the aid system... a moment of great innovation [could be at hand]."

Ms. Novogratz here hits on the theme that we often try to promote: that while capitalism is currently in doubt, there are plenty of thriving examples of places where free market solutions are leading to plenty of social good.

Flickr credit: zumerzetbill

Transcapitalist P2P Fund Adds MicroPlace: Like Kiva with Interest

After profiling the increasing returns offered by Microplace, we decided to add them to the Transcapitalist P2P Lending Portfolio. Microplace, like Kiva, focuses on micro-finance loans to entrepreneurs worldwide; however, they have passed the regulatory hurdles and can offer interest to their lenders.

MicroPlace’s mission is “to help alleviate global poverty by enabling everyday people to make investments in the world’s working poor…Microfinance institutions around the world have discovered an effective way to help the world’s working poor lift themselves out of poverty. These organizations need capital to expand and reach more of the working poor. At the same time, millions of everyday people here in the United States are looking for ways to make investments that yield a financial return while making a positive impact on the world. MicroPlace simply connects investors with microfinance institutions looking for funds.”

What is the Microplace model?

Microplace allows you to select investments offered by microfinance institutions in-country who define the terms of the loans. The microfinance institutions then make loans to the working poor in the communities where they work. Lenders can sort by region, level of poverty, focus (e.g., women-only), rate of return, and repayment date. The side also lists the repayment rates for each cohort, ranging from 95-99%.

What is my expected return?

Rates of return range from 1.5-6% and repayment dates range from 9-48 months. The specific portfolio that we designed has an expected rate of return of 4.2%.

Here is our portfolio:

Total Invested	Investment	Country	Rate of Return	Repayment Date	Repayment Rate
$50	Working Capital for Community Needs	Nicaragua	6%	48 months	98%
$50	Calvert Foundation	Kazakhstan	3%	21 months	98%
$50	MicroCredit Enterprises	Women Worldwide	5%	24 months	95%
$50	Azercredit	Azerbaijan	3%	33 months	99%
$50	Financiera FAMA	Nicaragua	4%	21 months	98%

What do I like so far?

• Really good website. Excellent filtering and upfront information makes for a clear and transparent experience. It’s a fun place to browse.
• High returns. At least for microfinance!
• Easy diversification. Lenders can invest in organizations world-wide with a wide variety of entrepreneurs and rates of returns.
• Great mission. Contributing to combat global poverty with a market solution.

What don’t I like?

• False advertising. The 6% only applies to a couple of investments; the vast majority fall in the 1.5-3% range.
• Distant repayment date. Most loans fall in the 2 year range. During that period, you have no access to your money (unlike Pertuity Direct which has an instant liquidity option for a 2% fee).

Still, I'm glad to see a microfinance p2p platform that allows the lender to earn interest! This will help make the concept more mainstream.

Microfinance to "return the economy to health"

Mohammed Yunus, Nobel Prize winner and founder of Grameen Bank, the first microfinance institution, has a suggestion to help lift the world out of the current crisis: microfinance loans. He made his name lending small sums of money, less than $2,000 to poor women in Bangladesh, but he sees hope in extending the concept through the developed world.

As covered by Forbes Magazine, during recent remarks at the Foreign Correspondents Club of Japan in Tokyo, Yunus "cites a program his bank started last January in New York City's Jackson Heights section, a low-income neighborhood in the borough of Queens that is home to many immigrants. Grameen America disburses loans averaging a paltry $2,200 to women there. Although New York has been hit hard by unemployment tied to the financial turmoil, Grameen's repayment rate there is still 99%, Yunus says: "In the same city where big banks collapsed, we're untouched by the crisis."

Yunus believes that microcredit could  spread across the United States as big banks contract. Grameen has attracted the interest of Susan Buffet from Berkshire Hathaway and is considering opening up branches in several U.S. cities. He hopes that microcredit can eventually replace payday loans and check-cashing shops: "Although we live in a world where we deal with billions of dollars down the block, people are looking for much smaller sums."

If you're interested in being a lender to international microfinance institutions, try out two peer-to-peer sites, Kiva.org and microplace.com.

If you're interested in being a peer-to-peer lender domestically, see our review of all the major players. Soon-to-come is a site directly focused on the payday loan market, YadYap.

Microfinance P2P lending platform Microplace claiming increasingly high returns

Microplace, a peer-to-peer lending site focusing on the niche international microfinance market, is bucking the current downward financial trend and offering increasing rates of return for its lenders. A competitor to Kiva, Microplace (an Ebay company) offers a similar line about how small loans can make a real difference in the lives of entrepreneurs in developing nations. By contrast, Microplace's loans are securitized, allowing its lenders to charge interest (set by the site) on their loans.

Microplace has claimed a progression of "average returns" since its foudning. The recent trend is impressive:

• September 2008: The Microplace blog claims "up to a 3% return"
• February 2009: The website's About section claims "a 5% return for everyday investors"
• Today: The front page of the website claims "up to a 6% return"