Micro-lending

MicroPlace, an eBay company, is a new online micro-lending platform. The idea of micro-lending can be traced back to Lysander Spooner, but the most well-known implementation was by Muhammad Yunus and Grameen Bank (2006 Nobel Peace Prize).

Foreign aid involves transferring relatively large amounts of money from government to government and is subject the usual inefficiency and corruption. Micro-lending places small amounts of money directly into the hands of specific poor entrepreneurs, for example $500 to a woman in Peru who wants to expand her pig farm. (Is a Peruvian pig an Oinca?)

The internet, of course, can help match people who have money with people who need money and there are several models available. Kiva matches lenders directly with the borrowers, but Kiva loans pay no interest. Kiva lenders diversify by spreading their money over several borrowers. MicroPlace matches lenders with organizations in specific countries. The organizatons spread the money out over many borrowers and pay the lender 2 or 3% interest. Is this a better model? Will below-market monetary interest attract more capital than individual stories with human interest?

Are loans better than grants? At Save the Children, one can sponsor a child for $28 a month. On the other hand, at current money-market rates, $28 in foregone interest works out to about $7000 in Kiva loans or $19000 in MicroPlace loans (to an organization that pays 3%).

We can compare micro-lending to peer-to-peer lending platforms like Prosper. At Prosper, the borrowers are not third-world entrepreneurs, but fellow Americans. The interest rates are much higher and the default rates are much higher. It is possible to earn above-market returns at Prosper, but in practice many lenders end up with below-market returns.

I say let many flowers bloom. Some of these models may not work, but there's no reason that several different models can't thrive at the same time.