The current economic crisis has a lot of people wondering where to put their money. The stock market is chaotic, some banks are wobbly and real estate, that old standby, is on a downward spiral.
But before you start stuffing money under your mattress, consider going online to loan some of it to a strawberry farmer in Ecuador, a secondhand clothing store in Senegal or a health food store in Zapata, Texas. Loans like these can be surprisingly safe and, in some cases, pay as high an interest rate as bank CDs.
I wrote about these microlending Web sites a year ago but that was before the financial meltdown. At the time, banks were paying pretty high rates for CDs and almost no one was talking about the possibility of bank failures or plummeting stock prices.
The two leading microlending sites are Kiva.org and Microplace.com. Kiva is a nonprofit organization that bills itself as the “world’s first person-to-person microlending Web site, empowering individuals to lend directly to unique entrepreneurs in the developing world.” Microplace is a subsidiary of eBay, which plans to donate any profits to the company’s Global Citizenship Project.
Microplace pays interest ranging from 1.25 percent to 3 percent, depending on the specific loan. Before you invest, you can read about the project to find out how the money will be used. In most cases, you’re lending to a fund which then re-loans the money to an individual or small business.
When I last wrote about microfinancing, I noted that 3 percent was low compared with most bank CDs. But that may no longer be the case. Some banks still pay more than 3 percent but many pay less.
Microfinance loans are not insured but they are a lot less risky than many investments in the developed world. Microplace founder Tracey Turner notes that borrowers reside in emerging markets which, while not immune from the turmoil, are “pretty stable relatively speaking.” She added that “we haven’t seen any change in the level of returns in investments in microfinance.”
Globally, according to Turner, microfinance borrowers repay about 97 percent of the funds loaned to them. But she said the risk is actually lower for her organization because of the nature of the loans and the lending organizations. A Calvert Foundation representative told me that they enjoy a 99.8 percent repayment rate, which is a very low risk.
There is a $100 minimum for your initial Microplace investment. Subsequent investments can be as low as $50.
While Kiva doesn’t pay interest, it does offer some advantages. First, it’s more of a “peer-to-peer” lending arrangement in which you get a bit more control over whom the money is lent to. Also, the minimum investment is only $25.
My favorite feature is that Kiva allows you to give gift certificates to enable others to make loans. It’s a great gift for children, especially as we approach the holiday season. Rather than giving physical presents, store gift cards or cash, you can give a child a $25 gift certificate to loan to an entrepreneur.
The child gets the experience whom to loan it to, gets to track their repayments over time and, eventually, gets to use the money for college or whatever else they need or want it for. Kiva also has what it calls “lending teams” that let people join together and recruit new members to increase the impact of their loans.
One concern about microlending is that the end-borrower typically pays a much higher interest rate than those of us who borrow from banks here in the United States. Interest rates to borrowers range from 18 to 60 percent but, on average according to Turner, about 30 to 35 percent.
But considering the size of the loans and the complexity of microfinancing, this isn’t necessarily an exploitative rate. When we borrow thousands of dollars in the United States, the amount of effort that goes into writing and servicing the loan is relatively small, considering the total amount of interest the lender will make over the life of the loan.
For example, a $30,000 car loan for five years at 6 percent will cost $4,799 in interest payments. At 30 percent, a $100 loan to a farmer in Bolivia will cost the borrower $30 a year. But unlike our car loans, the lender doesn’t just sit in an office and punch numbers into a computer and deposit monthly checks or electronic payments. The lender has to spend a lot of time working with the borrower, first to determine whether to give the loan and then, typically on a weekly basis, to collect payments.
And, yes, I’m putting my money where my words are. As I did last year, this holiday season I plan to give Kiva gift certificates to the children in my life and Microplace loans are included in my investment portfolio.