Two new microlending sites, Rangde.org and dhanaX.com were launched this year to facilitate loans between social investors and low income borrowers in India. Initiated by U.S.-based kiva.org in 2005, micro-lending websites allow individual lenders to invest in individual borrowers via associated microfinance institutions (MFIs) that disperse the loans. These sites appear to be similar to “peer to peer” (p2p) lending sites such as US-based prosper.com, but in reality, are connecting individual borrowers and lenders through a third party (the MFI). Though Rangde and dhanaX also act as microfinance brokers, they are distinct from Kiva because they only allow investments by people with Indian bank accounts. MicroCapital has done extensive coverage on the development of kiva.org including coverage of Kiva’s launch, growth, and operations as a non-governmental organization (NGO).
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MICROCAPITAL STORY: Microfinance Meets the Internet, Part 2 of a 4-Part Series on the Cracking the Capital Markets III Conference Hosted By ACCION and Credit Suisse
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.
NEWS WIRE: Facebook Launches a Person-to-Person Lending Service
The sixth-most-trafficked web site in the U.S. now has a personal lending element.
Facebook, the online social network, yesterday launched the person-to-person lending service managed by Lending Club. The service will allow users to borrow and lend money directly among each other. Borrowers can apply for loans of as much as $25,000, but they must have a credit score of at least 640 — essentially a prime borrower — to obtain credit.
Wall Street Journal Column Explodes Waning Definition of Microfinance
In the news wake of Mr. Yunus’ Nobel Peace Prize, the accepted meaning of the word “microfinance” has been transformed. The popular columnist Ron Lieber of the Wall Street Journal (subscription only) recently capped this development when he named the new internet firm Prosper.com as a microfinance player.
The term “microfinance” has been in play for some time as we reported in May when covering PlaNet Finance and ACCION International, two rich country non-profits that buck tradition by micro-lending both at home and internationally in poor economies.
Mr. Lieber focuses his article on technology. And for good reason, it is technology which has fundamentally changed the meaning of microfinance.
Two websites, Prosper.com and Kiva.org, which have both received ample press, are offered as ways “to be a micro-lender” either for a profit or to get your investment principle back while doing the right thing. Mr. Lieber is right that “peer to peer” micro-lending for a profit on-line will revolutionize microfinance. The reason is the cost structure of micro-lending.
To better understand this phenomenon, let’s look at the traditional microfinance model: in Boston, money is cheap and labor expensive whereas the opposite is true in Bangladesh. This fact makes microfinance a wildly interesting business in Bangladesh, whereas, in Boston, inversely, it mandated government and philanthropic subsidies. Prosper signals a change to this regime.
Prosper leaps the hurdle on one hand by “externalizing” labor costs using do-it-yourself, person-to-person, on-line micro-lending. On the other hand, the cost of capital is lowered because the middle-man is removed. Prosper is an auction marketplace working in the United States, supported by credit profiling and virtual self-help groups. Prosper’s borrower pool consists of individuals with the broad range of credit ratings (A through D paper). In this way, the same system serves people alike who have the option to lend from a bank and those that do not, thus reaching the traditional customers of microfinance.
So, Prosper serves poor people in Boston, but could it serve the customers of the Grameen Bank in Bangladesh? For now, those customers are not going to “do it yourself”, and will depend on micro-banks to secure financing. (For this very reason, Kiva.org, who works in emerging economies, partners with micro-banks, who in turn manage the customer inter-face on the micro-borrower side.) Therefore, while pure “peer-to-peer” micro-lending for the global poor world will not happened tomorrow, we will start to see micro-banks selling interest in their loans to individuals whether directly or, more likely, through a third party like Kiva or Prosper.
Hats off, then, to Mr. Lieber for finally cracking the term “microfinance” wide open by so labeling Prosper. We regret, however, that he let his tidy technology theme badly advise his readers about how to donate money to microfinance. He mentions three organizations which are well respected to be sure, but are not leaders in non-profit microfinance (DonorsChoose, ModestNeeds and GlobalGiving). These organizations are leaders in using technology to improve efficiency and transparency when donating to grass-roots projects. This is important work; the point is not to criticize these worthy organizations because Mr. Lieber over did his provocative and welcome essay. The point is simply that a donation is a donation whether made over the internet or a jar of coins dropped off at your local school. Please Mr. Lieber, if you are going to tell Wall Street Journal readers about charitable options in microfinance, then it is most responsible to start at the top of the list.
The fact remains that delivering good financial services to the global poor at a good price requires deep institutional expertise and infrastructure. Bangladesh does not have a Prosper (yet). The top microfinance charities delivering on their mission should not be overlooked in the name of slick writing, especially in a business publication like the Wall Street Journal dedicated to rational allocation of resources. Nonetheless, Mr. Lieber’s essay is brilliant because it demonstrates exactly how technology transforms what we mean by “microfinance” and the probable evolution of the same.