On March 10-11, 2008, ACCION International and Credit Suisse held the third Cracking the Capital Markets conference on microfinance investment. The conference brought together hedge fund managers, institutional and private investors, leading rating agencies, and microfinance institutions (MFIs) to discuss the challenges, successes, and future of microfinance investments. The first and third articles of this series can also be found on the MicroCapital website.
The conference’s last panel discussed the potential impact of the internet on how microfinance institutions (MFIs) finance themselves. The panel included intermediaries who utilize the internet to bring donors and investors to MFIs, small business, and individual borrowers. Presentations from this panel can be found here.
One intermediary is MicroPlace, which hopes to unlock a new source of capital for the microfinance industry. Its target segments represent 30 percent of the U.S. online population and have USD 22 billion available to invest. Via traditional channels, it has been prohibitively expensive for MFIs to directly address retail investors. Thus, MicroPlace sees the internet as means to take cost out of the equation, tap a new source of capital, and build a sustainable marketplace. A subsidiary of Ebay, MicroPlace is currently the only on-line broker-dealer creating a marketplace for everyday people to purchase investments from microfinance security issuers.
The Calvert Social Investment Foundation is working with MicroPlace to increase sales of its Community Investment Notes. The Calvert Foundation sees this partnership as an opportunity to “expand investment in microfinance on a scale [they] never could have achieved on [their] own in such a short period of time.” The sale of these securities will be invested in MFIs targeted by investors online, and the Calvert Foundation will be responsible for making interest and principal payments to investors.
For details on MicroPlace’s launch and interviews with key players, please see the following MicroCapital story. MicroCapital also reported on the Calvert Foundation’s partnership and how it became the first issuer to sell investments on MicroPalce.
A different internet-based intermediary is Prosper.com, which describes itself as an “Ebay for loans”. It is an online auction platform for peer-to-peer (P2P) lending, allowing individuals to bid on loans to individuals and small business in the US. This allows the interest rates to be bid down by lenders. Their goal is to combine the benefits of community investing such as strong loyalty with the good diversification and liquidity of institutional markets. As a side note, the site has seen a decrease in subprime borrowers and an increase in prime borrowers likely due to the tightening US credit markets pushing borrowers to non-conventional lenders. MicroCapital covered Prosper.com’s entrance into microfinance and the marketplace in the following article.
Final panelist Rob Stavis presented venture capital firm Bessamer Venture Partners’ view on social lending marketplace Zopa. In the US, Zopa is another P2P lending model where social investors can reduce borrowers’ interest rates. Zopa offers conventional prime-credit unsecured, fixed-rate loans and conventional fixed-rate 12-month savings certificates, both with market-leading rates. Zopa also operates in the U.K. and Italy using different models due to different regulatory environments and business opportunities.
The panelists also addressed how internet-based lenders may impact MFIs. The largest acknowledged advantage of the internet platform was the ability to rapidly scale up retail investor participation. However, disadvantages included concerns about privacy protection in the social lending networks and possible early market price distortions due to the social component. One audience member questioned how the current models can reach the unbanked and those people truly at the bottom of the world’s pyramid.
Other issues addressed included concern that the balance of power was skewed away from investors and borrowers to these intermediaries given they are establishing the regulatory and legal frameworks. Regarding due diligence, MicroPlace noted the need for complete disclosure of risks and comprehensive due diligence on the part of the platform. The importance of borrowers’ full and accurate credit information was also tackled. Currently, credit checks are provided by partnering credit unions in Zopa’s case, while Prosper.com uses several credit metrics some of which depend on community participation.
As for the future, the panelists felt that these internet platforms could grow to include other sectors such as student loans and insurance. Another desire was to list MFIs directly on the marketplace, thereby transferring the risk to investors as opposed to intermediaries such as the Calvert Foundation. However, current regulatory frameworks do not allow non-US based securities or firms to list on such platforms. Finally, several expressed desire to expand to a global scale, raising capital and investors in foreign markets.
ACCION is a private, non-profit microfinance organization, specializing in global micro-enterprise loans, business training, and other financial services. Credit-Suisse Group is a global financial service company, headquartered in Zurich. Credit-Suisse’s participation in microfinance can be found on the company’s website.
by Jennifer Lee
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