The evolution of microfinance from Kiva to Microplace was bound to happen and will contribute heavily to the popularizing of the movement... you look at this securities model and it feels somehow more distant than P2P lending - less warm and brochure-friendly. But is this not where microfinance pioneers, or for that matter, the leaders of any market-based solutions to poverty initiative want to end up? When we talk about the mainstreaming of microfinance or SME investment, essentially what we envision is moving out of the model of one lender, one small business at a time (as much as these encounters provide great photos for the covers of development institution publications) and into the cold vagaries of the profit-driven marketplace. Watch MicroPlace's progress closely, it is, like the Compartamos IPO, a major bellwether for the future of this movement.

I agree with Derek. This is a fantastic development. I doubt it will be too long before funds from people living in rich countries becomes the dominant source of personal lending to the poor. The interest rate arbitrage is just too good. The real challenge here is in the formative years, setting up that strong network of microfinance institutions that can sop up such a slush of cash. I wonder what the costs per loan are like through either service. Chaz

rates seem somewhat low compared to other MF funds. seems far far below what the actual returns are

Yes, the rates are not high, but who is taking the risk? I am no expert in the process, but from what I can tell, the MFI's are taking on the default risk of the individual borrowers, managing their portfolio of loans to keep non-payments low. Someone is taking on the exchange rate risk because the MFI's are usually lending in local currency. This exchange rate risk is increasingly significant given the current volatility in the $. And the note issuer (Calvert, etc.) is taking on the risk that the MFI might not pay. Given the little risk that investors are making, the returns are not that unreasonable. Other funds may pay more, but what risks are they taking on and what is the minimum investment? Plus, isn't there an additional return in the feel good aspect of it?

Even in the Kiva case, as I understand, the loans are not directly peer to peer. Kiva makes loans to the MFIs, which then on-lend to their customers. I highly doubt that the cash flows from a specific loan is propogated back up to a Kiva lender. More likely, the MFI is doing the aggregation that the security is doing in the Microplace case. (If this is not true, then someone can correct me.) In the Kiva model, it would be (and is) very hard to work in countries with highly regulated banking sectors (India, for example, where it is nearly impossible to get money into and out of individual MFIs). One imagines that Microplace could easily provide the same "user experience" as Kiva, without any loss in fidelity (since even Kiva's model is not *really* P2P), with a more solid operational and regulatory basis, and a better way to hedge risk. In that sense, how are they not competitors?

I have been trying to start a retail investment fund facilitating people investing in MFI's for the past number of years. But being based in Ireland and having little resources at this point, it is difficult. But with Kiva and Microplace, they do seem somewhat to be reinventing the wheel, in the sense that there are any number of investment funds up and running already and with very successful records. It is these funds whih I have been trying to attract to offer their funds for sale in Ireland. And as with Kiva and Microplace I am trying to start retail investing in MF, where the 'person on the street' can invest in the 'person on the street' and make a good return (in Ireland for example deposit rates are 0.5-1%, inflation is about 5%, so a return of 5%, through Blue Orchard for example, and with the return being tax-free, being designed to take advantage of tax breaks here in Ireland would be very competitive and so offer a huge market straight off). To me this can offer scaling up possibilities vastly beyond what kiva and Microplace will be able to muster. Why not just tap into the vast investments which Blue Orchard and the like have already established? I have approached them with this idea, they are interested, but I am still finding it hard to get people in Ireland interested, Ideas on a postcard please.

The kiva and microplace models seem to attract social investors who want a personal connection as well as a return on investments (social and/or financial). For instance the microplace website says that any profits generated will be invested in other social responsible ventures. On the other hand the Global Giving" uses a non-profit model that funds a profit based venture called "Many Futures" It appears from the financial stanements that the profit venture takes loans from the non-profit. http://www.globalgiving.com/aboutus/media/GGF_2006_AFS.pdf It looks skeptical if it is the right approach to run a non-profit (global giving) and channel funds to a profit based (many futures) organization. I wonder if the IRS or the auditors have an issue with this model. Should it not be the other way around where it is appropriate to use a profit based model to fund a non-profit?

The review of the financial statements at GlobalGiving may be of concern to donors of potential questionable practices related to the organizational structure, financial stability, and related party transactions? The following questions display information obtaned by reviewing the financial statements about GlobalGiving that needs clarification for transparency, accountability and the fiduciary responsibility towards the donor community and the general Public. 1.Isn’t the money loaned by GlobalGiving (non-profit) to Many Futures (profit seeking arm) coming from funds raised from Donor Support? If so, it appears to be inappropriate to use donor money to extend loans to Many Futures. The right approach to obtain loans or equity to profit making ventures such as Many Futures should be through personnel funds, bank loans, and/or angel investors etc. Has Many Futures considered raising capital/loans from other independent sources without relying heavily on Global Giving or other donor funds? 2. Why and for what purposes is the money lent by GlobalGiving to Many Futures used? When do Many Futures expected to pay back the principal and interest to GlobalGiving? According to the Financial Statements, the Foundation loaned $3,158,486 and $1,624,391 in 2005/2006 (April-March) and 2004/2005 (April-March) Fiscal Years. The Unpaid interest income during these periods was $203,817 and 57,021. http://www.globalgiving.com/aboutus/media/GGF_2006_AFS.pdf 3. According to the Financial Statements, Many Futures have sustained substantial losses of operations and may not be able to repay the loans to GlobalGiving which would have a material adverse impact on the Foundation's financial position, operating results and liquidity. It further describes that the unpaid loans (convertible notes) may be transferred into shares of Preferred Stock of Many Futures. This appears that donor money can be permanently lost, possibly be transferred to stock in the profit seeking arm and never distributed to the social projects. It appears misleading to ask for donor funds when it is clearly evident that the organization is in financial trouble. Have All the Donors and Partners made fully aware of the material loan amounts, financial instability and potential transfer of loans to preferred stocks in the Global Giving's website and other communication material for transparent dissemination of information? 4. Many Futures charges a 10% fee generated from all onor funds. Shouldn’t the fees charged to GlobalGiving and any other consulting revenue be able to run the operations of the profit making arm? This does not appear to be a sustainable model based on the substantial losses of Many Futures while taking material loans from the non-profit to maintain operations. Does the organization prepare forecasted reports to show the public of its sustainability or failures? 5. The objective of “Financial/Social Exchanges” is to distribute 95-100% of social investments/donor money to the targeted projects. (For instance, Kiva and Microplace distributes 100% of the social investments to the investee- MFI/Entrepreneur) It is not clear how GlobalGiving is going to accumulate revenues overtime to reinvest in social good, achieve financial discipline and be scaleable in the near future? 6. Can you clarify the financial statement note that 87-90% of every dollar contributed to projects directly goes to the project? According to the Form 990 (2005), the total donor contributions made during 2005/2006 (April-March) Fiscal Year is $4,457,328. The total Program related expenses are $2,133,482. Out of this amount, the grants distributed to organizations are only $1,817,540. This means the ACTUAL Program Expenses to Total Donor Revenue is ONLY 48%. (Key Ratio) 7. It appear misleading when the financial statement overstates the Program Expense Ratio (82%) when not even a 50% of the donor contributions are used to directly fund the charitable projects it is supposed to distribute? The Form 990 (2005) includes the Loans to Many Futures of $1,534,095 in 2005/2006 (April-March) Fiscal Year in calculating the Program Expenses Ratio (Key Ratio above) which grossly overstates the actual direct program support to the social and economic projects worldwide. Have you considered revising the financial statements (Form 990) to display the Financial Ratios accurately? 8. The CEO at Many Futures and the President at GlobalGiving are earning $160,000 and $101,500 per year (Form 990). It appears that the regular employees are making lower non-profit like salaries. In comparision to other social exchanges, this executive compensation seems excessive for a recently start-up organization running under the name of a social charity, while the profit seeking arm is operating at a loss. It would NOT be financially feasible for a real world company operating under market based mechanisms to pay executives such excessive salaries while facing substantial losses. A key indicator of compensation is based on financial performance and profitability (I.e. sustainability). A company with such negative results would generally terminate senior executives, reduce managerial positions and/or drastically reduce salary and benefits. What actions if any are taken by GlobalGiving to address excessive executive compensation issues? 9. The CEO and the VP Finance of Global Giving and Many Futures are the same individuals. The CEO/Chairman of Many Futures is also the Secretary of the Non Profit’s (Global Giving) Board of Directors. This structure seems very uncharacteristic to have the same personnel in control of both the non-profit and the profit seeking venture. Will the two organizations have independent members acting in the Management and the Board to eliminate any potential self-serving actions and to ensure objective decision making? 10. The CEO of Global Giving has ownership interests in Many Futures. In addition, the CEO and the VP Finance of Global Giving have stock options in Many Futures. As stated in the financial statements, the profit seeking arm is running at a loss while convertible loans of more than $3 million to date could be transferred as preferred stock of Many Futures. It appears that any potential stock option benefits derived by Many Futures may be coming from the funds distributed from Global Giving. This structure of transferring money from a non-profit to a profit seeking venture as preferred stock may be inappropriate and in violation of independent accounting standards. Should the default of any money loaned be considered income to Many Futures and a loss to GlobalGiving? 11. There may be transparency and accountability issues when a non-profit funds (convertible loans or other financial means) a profit seeking arm that has related party transactions. A profit making arm funded by a non-profit appears inappropriate. It makes one skeptical if Global Giving structure can be considered a TRUE tax-exempt non-profit organization. This seems like a very uncharacteristic organizational structure that is drastically different from other non-profit models. would you consider recommending the termination of the profit seeking arm that is mainly funded (based on commissions and loans) by the non-profit? In general, shouldn’t this organization be structured as a non-profit (GlobalGiving) or profit making venture (Many Futures), not both? 12. Should the IRS and the Audit firm revist the non-profit's activities that will be helpful to clarify the company structure, financial stability and related party transactions. It appears that a senior IRS official (Former) assisted with the designing of the organization. 13. It is recommended that the organization seek a peer audit from another independent audit firm and request the IRS and public oversight bodies to evaluate the organization’s operations and the non-profit tax-exempt status. This should be done in a transparent and accountable manner and the results fully disclosed to the general public. It is important for people to discuss these issues to determine the transparency of emerging social lending initiatives.

Dear "anonymous," I appreciate that you have many questions about GlobalGiving and the relationship between Many Futures and the GlobalGiving Foundation. Many of the questions you ask are answered on our website, and the agreements between the two entities was developed by a tax lawyer who was the most senior non-profit sector expert at the IRS in the 1990s. He/we would be happy to address your questions. It seems that many of your statements/questions are predicated on an incomplete understanding of exactly how individual project-directed donor funds are handled vs what "capital" donors are funding, as well as a few other misperceptions. We have always been very transparent about what we are up to and would be happy to address your long list of questions directly...and would be willing to do so for any other readers of this post who are interested. But responding to your points 1-15 seems like a recipe for boring the readers of this blog to death (especially since nobody else has responded/commented desiring similar levels of detail in this forum in over two weeks). Please feel free to respond or preferably, to email me at dcallejon@globalgiving.com if you would genuinely like to pursue the conversation. Donna @ GlobalGiving

The Microfinance Gateway recently published an excellent piece comparing Kiva and Microplace. If you are interested in this space, and in these two players in particular, be sure to check it out.