Microcredit Investments: Doing OK While Doing Good

Socially-conscious people are finding more avenues for furthering good causes these days. Those interested in microlending have a few new options to think about—including some real investment opportunities. …

Socially-conscious people are finding more avenues for furthering good causes these days. Those interested in microlending have a few new options to think about—including some real investment opportunities. As one might expect with do-good causes, the returns aren’t great, but these vehicles can help diversify a portfolio or put idle money to good use.

Using microfinance as a means of lifting people out of poverty showed up on the global development scene in the 1970s, and since then microlending institutions have been funded primarily through charitable donations. Organizations such as Trickle Up and Grameen Bank have made billions of dollars available to entrepreneurs all over the world.

In today’s world of social networking, the microlending scene has gone online. Person-to-person lending site Kiva, for example, raised $25 million in its first two years by allowing individuals to earmark their loans to specific borrowers. The small size of most of the loans, and lenders’ ability to fund in increments of $25, is attractive to many individuals who don’t want to tie large sums of their money up in accounts with no return. Kiva ranked number one on NuWire’s Top 15 Charities for Investors for 2007.

In the last few years, the view of microfinance as primarily a charitable cause also has begun to change. The Consultative Group to Assist the Poor wrote in a February that “the entry of private investors is the most notable change in the microfinance investment marketplace. New players arrive on the scene every month.” The Global Development Research Center (GDRC) says there are now 13 million microcredit borrowers with US$7 billion in outstanding loans, and the volume is growing at a 30 percent annual rate.

GDRC also says the repayment rate for microloans is 97 percent. At that rate, it’s no wonder that private investors are interested. Here are a few thoughts about opportunities to earn modest returns through microlending.

Securities investments

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The most common way for socially-conscious investors to get into microlending is to put money into a security or note that raises capital for a microfinance institution to fund loans. This is the approach taken by MicroPlace, which says it is “currently the only website that provides everyday investors with the ability to make investments in the microfinance industry.” The investment is actually in a note issued by Calvert Foundation, which funnels the principal to lending organizations that make loans to borrowers. As with other debt instruments, interest is paid over the term of the security, but investors don’t get any principal payments until the security matures. Interest rates of up to 3 percent are available, and investments can be for as little as $50.

MicroPlace investors can choose whether their loans will benefit the “extremely poor,” “very poor,” or just “poor.” They also can choose to lend money to further specific social goals, such as helping women and serving the rural poor. However, unlike the person-to-person approach of Kiva, money invested through MicroPlace is not earmarked for a specific borrower—only for lending institutions whose “sample borrowers” are described on the website.

Investors who want to put in at least $1,000 can go directly to Calvert Foundation and make the investment there. However, smaller investors won’t be able to earmark money for a specific microfinance organization. Investments can be made for terms ranging from one to 10 years and can be targeted to a specific region, including individual U.S. states as well as foreign regions. The investor chooses what interest rate to receive, up to 3 percent. Calvert says more than 15 percent of its investors choose to earn no interest, allowing the fund to offer better rates and more flexible terms to its nonprofit partners which, in turn, enables them to devote more resources in the field.

Canadian investors have another opportunity to invest in Calvert notes that are used to fund microlending, through CitizensBank of Canada. CitizensBank’s Shared World Term Deposits are available for amounts as low as C$100 and are insured up to C$100,000 by the Canadian Deposit Insurance Corporation. Rates are locked in for the term of the deposit and were at 2.8 percent for a one-year term in mid-August 2008. The money is loaned dollar-for-dollar to international community loan funds offering credit at reasonable rates to low-income men and women in Latin America, eastern Europe, Africa and Asia.

Peer-to-peer loans

There are few avenues for peer-to-peer lenders to be involved in microcredit. The most popular lending sites aren’t focused on global development and lifting people out of poverty.

For example, don’t confuse Prosper with microlending just because you can lend a small portion of borrowers’ loan requests. This is not a do-good site in the same way that Kiva and MicroPlace are. Many of these loans go to paying off credit card debt or financing a wedding. These kinds of loans are not figured into GDRC’s 97 percent microcredit repayment rate.

One example of peer-to-peer lending that benefits poor regions is MyC4.com, a Denmark-based effort that lends money in Africa to entrepreneurs who already have a small business or company but lack access to finance. Loans are denominated, and fees paid, in euros, so there is some currency risk involved. The site recently ended its collaboration with PayPal that facilitated money transfers from U.S. investors, so withdrawing money from MyC4 accounts may be difficult until a new arrangement is set up. For lenders who have a longer time horizon, bank wire transfers to MyC4 make it possible to get started, and the interest rates (now averaging 12 percent, they say) may balance the risks.

U.S.-based Fynanz.com is a new niche site with a couple of twists. First, it services only student loans that cover “qualified education expenses.” Second, lenders bid on the loans in an open auction process that allows them to weigh the student’s creditworthiness and offer a competitive interest rate for the loan. All borrowers are assigned a grade based in part on their academic characteristics, including grade point average, course of study, school, class standing and year of study. Lenders might earn in the 7-8 percent range, and lenders can bid as low as $50 with higher increments of $25. A recent review of the site found students asking for loans of $2,600 to $7,500—amounts that might be considered microloans in the U.S. economy.

On the horizon: a Kiva representative says her organization is contemplating building a mechanism into its platform so that its partner microfinance institutions will have the option of offering modest returns to investors. That option would allow it to compete with MicroPlace while sticking with its person-to-person approach.

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