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Making Money off Microloans

Microplace.com is not the first website to give Americans the chance to use their money to help poor people get small loans. Kiva, for one, has allowed people to invest directly in small ventures around the world. But Microplace is the first to pitch this as a true investment opportunity, because unlike the nonprofit Kiva, Microplace give its customers the chance to profit. Its online ads juxtapose a poor woman in the developing world with an American man happily driving a convertible, presumably a little bit richer from his investments at Microplace.

NARAYANAN: We’ve launched recently a 5 or 6 percent rate of return, which is very interesting to people in the current economy.

Ashwini Narayanan is Microplace’s general manager, and if it seems surprising that the sales pitch sounds like an ad for a bank account, that’s the point. For years, microfinance has been treated by many as charity. Microplace, which is for-profit, and a division of eBay, has been making the pitch that its investments offer a better return than money market funds and bank accounts, and also have the side effect of helping reduce poverty.

It was reducing poverty that attracted Paul Metzloff of Columbus to the site.

The 41 year old is a fourth year seminary student, says he’s invested over $2000 because he had heard about Mohammed Yunus and wanted to get involved in the power of microcredit.

METZLOFF: 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’d rather do that than help some wealthy businessman fly on a private jet to get a facial at a spa.

But what exactly is Metzloff investing in? Microplace is kind of an online brokerage. They’re registered with the Securities and Exchange Commission, and when you create an account, you’re given the option of various bond-like securities created out of bundles of loans from around the world. Most have a set term and interest rate.

The securities are offered by a number of different companies and nonprofits such as Calvert and ACCION.

That attention-getting six percent return happens to be available on a four-year note whose loans help extremely poor entrepreneurs in Nicaragua.

Investor Metzloff says he likes all the choices.

METZLOFF: One of my original goals was to have an investment on every continent, and I’ve managed to do that.

And some investments even help here in the US.

BROOKS (nat): Let’s see, we’re working on a bunch of houses, some smaller commercial stuff…

Richard Brooks is an electrician in Brooklyn Heights. Last year, he went to his bank to try to get a loan to keep his business going.

BROOKS: No bank wants to give a contractor loans, because contractors fail too much…unless you want to sign off your house to them, then you can get a loan…

So, Brooks ended up getting a microloan of about $10,000 from ACCION USA—that’s considered small in this country; microloans in the developing world can be as little as tens or hundreds of dollars. Brooks’s loan was bundled with others and offered as a security on Microplace. Metzloff put some money in that loan, so you could say a small portion is helping keep Brooks’s business going up in Cleveland.

But that bundling and securitizing, which is supposed to reduce risk, sounds suspiciously familiar to Case Western Reserve University finance Professor Scott Shane.

SHANE: This was the same argument that was made for mortgage-backed securities. 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, or a health problem...

Narayanan of Microplace says the investments are not without risk, but the track record has been good. The company is quick to tout a historical 97 percent repayment rate among microfinance borrowers, and says microfinance has been mostly left out of the global financial crisis. Unlike banks in the mortgage crisis, Narayanan says microloan organizations know a lot about who they’re lending to.

NARAYANAN: The whole microfinance industry works on the basis of trust. The loan officer knows the borrower, has to make sure that the borrower can actually make that interest payment and so I think that’s part of the basis why microfinance is still doing well in this economy.

Still, the risks and newness of these investments might be part of the reason so few have tried it. There are only 4500 investors so far on Microplace, and the average account size is just $350. Their biggest motivation for now is…philanthropy. For all the talk about this being an investment, most seem willing to just put in money they would have given to charity—glad to get it back eventually.

Paul Metzloff, the investor from Columbus, says it’s the good these investments do in the world that attracted him. The interest rates are just an incentive to put a little more in.

METZLOFF: I’ve received a couple of emails where they’ve said hey, here’s a good interest rate. Here’s 5 percent or 6 percent. Make your investment here. I looked at that and it was attractive to a degree, but still at the bottom, like any investment it says this is not a guaranteed thing, this may fail, this is not a guarantee like money in the bank, FDIC-insured.

Microplace says it continues to tweak its message to attract more investors like Metzloff—people who want to use their money to do good rather than just do well.