A close look at online funding for microfinance

Online platforms connecting lenders and investors with poor entrepreneurs in the developing world have revolutionized the way microfinance organizations are funded. Currently, Kiva and MicroPlace are the two online platforms that are available in the U.S. Considering how new they are, it is not always easy to understand the main differences between them. In this article, we will take a close look at both platforms to highlight their main differences and evaluate their outcomes to date.

The stories behind Kiva and MicroPlace

Kiva and MicroPlace were developed almost simultaneously, and were, in some ways, connected, even though they were launched two years apart. Both are based in California and were founded by “young, socially-conscious entrepreneurs.” 1

Jessica and Matt Flannery started Kiva in October 2005, following the model of “sponsor a business,” or “person-to-person lending.” According to Matt, “the seed for the Kiva concept came from the child sponsorship model. Child sponsorship has been an effective tool for pulling at heartstrings and attracting donor dollars.” 2 Thanks to the founders’ experience in Africa, they were able to develop some connections in a village in Uganda, which allowed Kiva to post the profile of the first seven entrepreneurs.

Once the model was tested, the next step was to post 50 more entrepreneurs from the same village. Kiva became popular when their model was featured at DailyKos, one of the world’s largest blogs. The increase in audience not only allowed Kiva to raise all the money needed to fund the 50 entrepreneurs, but also opened the door to make contact with several small microfinance organizations from around the world interested in funding from Kiva.

On the other hand, when Tracey Turner, the founder of MicroPlace, finished business school, she went to Dhaka, Bangladesh, to work for several months with the Grameen Bank. After this experience at the “Mecca” of microfinance, she was convinced that microfinance was a powerful tool to alleviate poverty. Her approach is based on empowering the poor, and treating them as equals. According to Tracey, “That is why MicroPlace is about investing in the world’s working poor, not about charitable handouts.” 3

MicroPlace was created when Tracey saw that investment opportunities in microfinance in the U.S. were not easily available for everyday people. In fact, there are only few microfinance funds, such as Calvert Foundation, Oikocredit, WCCN’s Loan Fund and Shared Interest that offer investment opportunities to retail investors. Before MicroPlace was created, the minimum investments in these institutions were between $1,000 and $2,000. Rather than reinvent the wheel by creating another fund, MicroPlace partnered with existing microfinance funds, also called issuers, to facilitate offers for investment opportunities as low as $20.

What are the main differences between Kiva and MicroPlace?

The basic difference between Kiva and MicroPlace is that Kiva is a platform to lend, and MicroPlace is one to invest. Although lending and investing might sound the same, legally, they have different meanings and implications. Kiva’s lending is done without an interest return. Offering a return, like MicroPlace does, enters into the field of securities, which is highly regulated by state and federal laws.

Commentators have said, “MicroPlace adds a level of intermediation that Kiva doesn’t have.” 4 However, as noted on the chart to the side, the number of steps in each model is the same.

To understand the main difference between the two models, we need to look at the roles of the players involved in each one. We think that the easiest way to do this is to start our analysis backwards, beginning with the end borrowers and finishing with the lender/investor.

1. End borrowers: The final recipients of the microloans.

   Who they are? Kiva’s end borrowers are small-scale urban entrepreneurs and rural farmers living in poverty or extreme poverty in the developing world, and also in the US. MicroPlace’s end borrowers are exactly the same.

   How are they selected? Contrary to what may easily be inferred from Kiva’s website design, its borrowers are selected and get a loan from the microfinance institution (MFI), before their profile is posted on Kiva’s website 5 – not after they are funded by the U.S. lender. There is nothing wrong with this; however, this sequence of events may not be obvious to many of Kiva’s supporters. MicroPlace, on the other hand, highlights “sample” borrowers that receive loans from an MFI before, and independently of, their appearance on MicroPlace.

   How are they profiled on the websites? Each of Kiva’s borrowers has a picture and a profile on the website. MicroPlace has only a few pictures and profiles of sample borrowers from each MFI on the MicroPlace website.

   What interest rate are they paying? Kiva’s borrowers pay the market interest rates charged by the MFIs from which they are borrowing. The same is true of MicroPlace’s borrowers.

2. Microfinance Institutions (MFIs): MFIs are the organizations on the ground that specialize in lending to the poor. Typically, they are NGOs that specialize in microfinance, savings and loan cooperatives, or regulated financial institutions that focus on providing financial services to the poor.

   What is the relationship between the platforms and the MFIs? In Kiva’s case, MFIs are selected by Kiva itself. Initially, the process of selecting the MFIs was very casual, but over time this has been done with more care. In the case of MicroPlace, the MFIs are selected by the issuers who have developed expertise in selecting organizations based on strict evaluations of financial and social performance. As Kiva borrows at 0% interest, it also lends to the MFI at 0% interest. Once the MFI repays Kiva, the lenders are repaid. Because the MicroPlace model strives to be self-sustainable, MFIs receive loans from the issuer at market interest rates, and repay them at maturity, allowing the issuer to repay investors.

   
   

   Filadelfo Sotelo is a member of a vegetable cooperative near Sebaco and has been taking out microcredit loans from Fondo de Desarrollo Local (FDL) for three years. Photo by Michael Keinitz.

   How much funding is received from the online platforms? In the case of Kiva, there is a monthly disbursement to the MFIs, according to level of funds attracted by the website. In the MicroPlace model, an MFI receives loans from the issuer as part of an ongoing lending relationship that it is totally independent of the level of investments attracted online. Monies invested in a particular investment note on MicroPlace never exceed those lent to MFIs by issuers such as WCCN.

   How much burden is it to be part of the platform? In Kiva’s case, there is certainly an advantage to receiving funding at 0% interest which is then loaned to borrowers at market rates. However, MFIs bear the cost of marketing their borrowers on Kiva’s website. MicroPlace requires no borrower profiles directly from MFIs. Sample profiles and pictures are prepared by the issuer in coordination with the MFI, at minimal expense to the MFI.

   What kind of reporting do they have to do? MFIs that work with Kiva report delinquencies, and at the end of the loan term, provide a loan impact summary. In the case of MicroPlace, MFIs report financial and social performance to the issuer, typically on a quarterly basis.

   Are MFIs liable in case of default? In Kiva’s case, MFIs are not legally liable to lenders or to Kiva if borrowers default. In MicroPlace’s case, MFIs are liable to the issuer, and the issuer is liable to investors — through MicroPlace and otherwise.

3. The platform: Kiva defines itself as “the world’s first person-to-person micro-lending website.” MicroPlace defines itself as “a social business owned by eBay.”

   Mission: Kiva’s mission is “to connect people through lending for the sake of alleviating poverty.” MicroPlace’s mission is “to help alleviate global poverty by enabling everyday people to make investments in the world’s working poor.”

   Legal structure: Legally, Kiva is non-profit and MicroPlace is for-profit. This could suggest ideological differences between them. However, both chose their legal structures for very practical reasons. According to Matt Flannery, Kiva became a non-profit because “we decided that the 501(c)(3) status would help us form a bond with our users and raise a small amount of donation capital to get the idea off of the ground.” 6 He says the decision was “fiercely practical,” and, “these are tax structures; not religions.” 7 Because it sells securities, MicroPlace had to register as a broker-dealer, regulated by the SEC, which only for-profits can do.

   How do they operate? Since Kiva does not work with issuers, it has to search worldwide for MFIs by themselves. MicroPlace works through issuers and has a rigorous selection process.

4. The online lender/investor

   Who can participate? Anyone around the world can lend through Kiva’s website. To be able to invest in MicroPlace, you have to be a U.S. resident.

   What is the profile of the lenders/investors? Kiva’s lenders are very diverse in terms of interests, countries, and religious and political background. Meanwhile, MicroPlace’s research has found that its investors tend to be well-educated, financially comfortable, well-traveled and socially minded people who want to make an impact on poverty.8

Online platforms’ main contributions and philosophy

Kiva has generated a grassroots passion for microfinance, especially among college students. The fact that Kiva offers volunteer opportunities has also allowed young people to get involved and spread the word about microcredit as a method of poverty alleviation. As a model, it lends at 0%, with an add-on cost to MFIs in the form of marketing collateral.

MicroPlace is trying to make a cultural change in the way people in the U.S. support microfinance, from charity to an investment opportunity in the working poor. It is focused on efficiency of capital raising, providing large amounts of capital at lower cost to the MFI. Because the amount of available capital in the investment space is larger, MicroPlace’s model attempts to be sustainable, with the aim of raising more capital in the long-term. When current MicroPlace investments mature, the goal is to encourage reinvestment of principal plus interest earned, which will add scale to the model.

While the two platforms have important differences, both have proven successful in garnering support for microfinance worldwide, a commonality that can certainly be celebrated.

Notes:

1 The Microfinance Gateway (2008). “Open Up Your Virtual Wallet.” www.microfinancegateway.org.
2 Flannery, Matt (2007). Innovations. Winter & Spring. Pages 39 and 55.
3 O’Neill, Meaghan (2008). “Meet Change Maker Tracey Turner of MicroPlace.” Planet Green. http://planetgreen.discovery.com/work-connect/change-makers-tracy-turner.html
4 Katz, Rob (2007). “Kiva vs. MicroPlace – What is the Difference?” Next billion. www.nextbillion.net/blog/2007/10/24/kiva-vs-microplace-whats-the-difference
5 Caruso, Carol (2008). Technology & Microfinance. Kiva.org. Global Microfinance Conference.
6 Flannery, Matt (2007). P. 39
7 Flannery, page 53.
8 MicroPlace (2008). Impact of Technology on Microfinance. Global Microfinance Congress.

By WCCN Staff