A few months ago, MicroPlace, an organization owned by PayPal made an offer that was simply irresistible. They would give you $20 and all you had to do was to take the cash and invest it in their micro lending operation, specifically with the intention of helping victims of the Haiti earthquake to recover.
Not only that, but they would actually pay you interest on the money, offering a rate of interest of 2%, better than any savings account could offer. While that deal is no longer available, it did introduce tens of thousands of people to joys of socially responsible micro lending and investing. Here’s how it works:
Socially Responsible Investing
People in the developing world aren’t necessarily looking for handouts from people in wealthy countries. Many of them genuinely want to better themselves by starting small businesses or purchasing an animal, such as a goat, which can provide an income for the family. However, rather than simply take money for the purchase, many such people are turning to micro lending organizations such as Kiva and MicroPlace to secure small loans to cover the purchases required.
Tiny Amounts, Massive Impact
The amounts of these micro loans are tiny by American or Western European standards – a typical micro loan would be around $100-$200 with interest in the 2-5% range, payable over a course of a few years. The loans have extremely good payback rates, comparable to those of loans made by western banks (and with the recent downturn of the economy, the rates of payback are sometimes higher than those most commercial banks receive).
Spreading the Risk
The reason that the payback rates are generally good is that, as MicroPlace points out, they spread the risk around. This means that the money is not actually loaned directly by them to the people who need it, but is instead loaned to an organization on the ground in the affected country, which will in turn loan the money out to those who need it.
This arrangement allows two things to happen. First, it keeps the logistics simpler, allowing such organization to support multiple locations around the globe. Second, it also allows them to spread the risk so that even if a percentage of the loans are not paid back, there is enough money coming in to pay back the investors who have pledged their money.
Of course, just like traditional investing, micro loan investing is a risky business where you could lose your money. Kiva and MicroPlace both take great pains to point out that their investments carry a significant amount of risk. However, at least in the case of MicroPlace, they also point out that they have never had an investor lose their money, because of their careful practices, which limit the exposure of any individual investor.
Not a Donation
One other thing to keep in mind when investing with a micro loan organization is that these are not considered to be charitable donations. You cannot claim them on your taxes as such and you do in fact have to claim capital gains taxes if and when the loans mature and pay back the money you gave. Still, when you consider that this is a way to not only do good but also make some money as well, micro lending seems to be a worthwhile idea whose time has come.
George Gallagher is a finance and education writer from Credit Union Student Loans. He also works with parents to find not-for-profit personal student loans for their children.