When you invest your money, can you both do good and do well? A new online broker thinks you can by investing in microfinance.
Perhaps you've heard the stories of how a loan as small as $100 helped a woman in the Third World start a successful business. Now MicroPlace.com wants to make it easy for ordinary American investors to make money off those loans.
After reading a book by microfinance pioneer Muhammad Yunus, Paul Metzloff was inspired by the ability of small loans to help raise people out of poverty. The fourth-year seminary student from Columbus, Ohio, wanted to find a way to put some of his money into microloans.
"If I can use my little bits of money to help people who are truly poor, then I think that's a good thing, even if I'm not making massive interest on it," he says.
So, Metzloff started investing at MicroPlace.com. The site, which is a for-profit arm of eBay, acts as an online broker for microfinance securities. They're similar to bonds, and most pay a return between 1 and 3 percent.
But with the financial crisis driving down rates on traditional savings accounts and money market funds, MicroPlace hopes more Americans will look to its site as an investment alternative.
"We've launched recently a 5 and 6 percent rate of return, which is very, very interesting to people in the current economy," says Ashwini Narayanan, MicroPlace's general manager. She touts the microfinance securities as a fairly safe alternative to traditional investments.
They are not FDIC-insured, rock-solid savings accounts, but so far, she says, no one has lost any money in the microfinance investments. Microfinance has been largely immune to the global recession, and Narayanan says about 97 percent of borrowers, even the poorest, pay back their loans.
"The whole microfinance industry works on the basis of trust," she says. "The loan officer knows the borrower [and] has to make sure that the borrower can actually make that interest payment."
Still, there are real risks. The securities on MicroPlace are made up of bundled microloans. That's supposed to diversify the investments, lowering risk. But that's eerily similar to mortgage-backed securities, says Case Western Reserve University finance professor Scott Shane.
"The problem that we saw with mortgage-backed securities is, what if there's an effect that hurts absolutely everybody in that economy. You have an earthquake somewhere or you have a financial crisis in that home country," he says.
Perhaps it's that fear that is keeping people from putting more of their money into these microfinance securities.
While MicroPlace says its users are investing far more money this year than last, there are fewer than 5,000 investors so far on the site. By comparison, Kiva, a nonprofit competitor that's been around a few years longer, has nearly half a million users, even though they earn no interest.
MicroPlace's average account size is about $350. Metzloff, the investor from Columbus, has invested more than $2,000 so far. While the interest rates are an incentive to put more money in, he says it's the moral attraction that keeps him hooked.
"You can choose to help some poor woman in Guatemala run a grocery store to feed her children. And I'm not very knowledgeable about financial things, but I would rather do that than help some wealthy businessman fly on a private jet to get a facial at a spa," Metzloff says.
MicroPlace is finding that despite the rising interest rates, most of its users are like Metzloff: They see it more as charity than an investment tool. So the company is re-evaluating its sales pitch, trying to present itself not as the next great investment, but as the face of modern philanthropy.
Dan Bobkoff reports for member station WCPN.
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