NextBillion.net - Development Through Enterprise - Kiva vs. MicroPlace - What's the Difference? - Comments

There is news in the media

Microfinance Enthusiast — Thu, 05 Jun 2008 20:50:52 -0500

There is news in the media about micro place asking the Americans to invest in the platform making 2% or so returns thru the newly launched "small change big change" program. It appears that the interest rates charged to the MFIs are much higher (5%-9%). But the difference goes to the middlemen that administer the loans like Calvert, Micro Place and Microvest etc. If does not seem appropriate that the bulk of the interest rate goes to cover the costs and benefit these high maintenance, costly administrators operating in the USA. There are upcoming platforms like www.dhanax.com, www.globefunder.in and others that pay "Market rates" to the investors while operating in a sustainable manner. Hopefully, these investments will be available to US investors in the future that target the same micro-entrepeneurs (as micro place) the third world countries. Microfinance generally targets people in the south who are much different from the people in the north. The Microplace portfolio of investments are well diversified around the south. However, a noticable observation made is the appearence that these administrators are NOT truly diversified in the Management and Boards. (For instance, there are no key people from third world countries like South Asia, Africa, East Asia etc represented in the management and Boards). I wonder if this is ignorance, racism or some other factor why no one from the south is non-existent?? It may be good to start local platforms to target investors and micro-entrepreneurs paying market rates while recruiting more diversity to the Management and Boards.

Kiva Chronicles

Rob Katz — Thu, 29 May 2008 09:10:23 -0500

Subhodip - there is a blog over on Social Edge written by Matt Flannery, co-founder of Kiva called Kiva Chronicles. I would encourage you to check it out; in some of Matt's older posts, he discusses regulatory challenges. You may also try and get in touch with them directly. Best of luck with your new site!

India specific P2P & B2N company.

Subhodip Dutta — Wed, 28 May 2008 23:18:08 -0500

I am looking forward to launching an Indian specific P2P lending site which would be a mixture of all three sites prosper,kiva & microplace.Already in the process of coding and designing would really appreciate if any one guide or throw some more light on the regulatory licensing aspects of the business and other country specific government permissions. Suggestions from mentors are welcome. subh10@gmail.com

More on Kiva/Microplace

Rob Katz — Wed, 16 Apr 2008 10:08:23 -0500

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.

so many things to respond to

Donna Callejon — Mon, 03 Mar 2008 22:14:29 -0500

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

Is there a difference std of transparency for Global Giving?

Anonymous — Tue, 12 Feb 2008 15:39:30 -0500

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.

Thanks for your question

Dennis Whittle — Mon, 19 Nov 2007 17:38:46 -0500

Thanks for your question about this. Our goal at GlobalGiving is the same - to generate revenues over time to reinvest in social good. We set it up this way to bring to bear as much discipline as possible on the operation of a philanthropic exchange that provides value to donors and social entrepreneurs alike. We wanted to create the initial conditions to make the exchange as effective and scaleable as possible, while maintaining its focus on the mission. (In fact, we designed this structure with the guidance of the former head of the IRS's tax-exempt division.) That said, I don't think anyone knows exactly what form will work best in this emerging field. The rapid growth of Kiva and the launch of Microplace demonstrate how different approaches are being tried. One particular form of organization may eventually emerge as the single best approach. Or we may end up with a whole variety of forms to serve different needs and niches. The main thing is to have good people working on it, and the folks at Kiva, Microplace, and a few other great new organizations are very smart and have their hearts in the right place - a great combination. We are really happy to be working side by side with them to try to make a difference in the world.

Kiva and Microplace vs Global Giving

Anonymous — Sun, 18 Nov 2007 16:16:45 -0500

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?

investing in MF

Garrett Wyse — Fri, 02 Nov 2007 08:09:20 -0500

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.

A third one is out there!

mads kjaer — Mon, 29 Oct 2007 18:30:32 -0500

It's great with both the microplace and kiva initiatives. Yet there is a third one out there! www.myc4.com (My Care For) has been in beta since May 2007 and the first 150 loans in Uganda have been founded from +800 investors (and investor groups) from 35 countries. Ivory Coast will join MyC4 as the 2nd country in Africa and another 51 to follow step-by-step. The investors being both private, organizations and company's and the African entrepreneurs being both micro- as well as macro businesses. The Dutch auctions allows for various interest rates from the investors and a possible lower than asked for by the Africa business. MyC4 is solely focusing on Africa and is also using the UN MDGs for reporting and have the vision to connect capital wth business in Africa and through this reach the UN MDGs latest by 2015. Eradicate Poverty Through Business. B rgds Mads Kjaer CEO and Co-Founder MyC4 A/S PS: 100 invested on MyC4 is 100 received by the African business! Its free to invest.

Re Tapan on Microplace and Kiva

Rob Katz — Mon, 29 Oct 2007 07:34:28 -0500

Kiva - like MicroPlace - is not directly P2P. As Tapan points out, loans through Kiva are administered through an intermediary MFI. In short, a Kiva lender actually funds a MFI who then loans to a designated recipient.

In MicroPlace, on the other hand, a "lender" purchases a security that a financial institution uses to fund a MFI - one more level of intermediation.

Will that extra level of financial complexity hurt the user experience? Only time will tell. Will it give MicroPlace the ability to pay interest to its lenders? Yes. Will it be better able to hedge risk, and operate on a "more solid...regulatory basis?" I'm not sure.

Are Kiva and MicroPlace competitors? I stand by my previous comment: yes and no. They compete in the sense that individuals who want to fund microloans now have multiple platforms through which to do so. However, Kiva has a pretty firm hold on the "feel good" market - people enjoy its personal touch and 1-to-1 connection with loan recipients (even if those borrowers are indeed getting money from a MFI, not a Kiva lender directly.)

MicroPlace has not shown that it can compete with Kiva on the "feel good" level (again, time will tell) but it certainly wins in terms of return on investment: Kiva offers a zero percent return, while MicroPlace will pay lenders interest.

Thanks Tapan, for prompting me to really think through this. It's not a simple black-and-white comparison...

Microplace vs Kiva

Tapan Parikh — Sat, 27 Oct 2007 11:31:26 -0500

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?

risk and return

Marshrat — Thu, 25 Oct 2007 12:59:00 -0500

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?

rates seem somewhat low

Anonymous — Thu, 25 Oct 2007 00:32:44 -0500

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

I agree with Derek. This is

Chaz Littlejohn — Wed, 24 Oct 2007 16:28:00 -0500

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

Kiva vs. MicroPlace - What's the Difference?

Rob Katz — Wed, 24 Oct 2007 08:30:36 -0500

MicroPlace, a wholly-owned subsidiary of EBay, launched its new web site today with a flurry of press releases and coverage in both Reuters and BusinessWeek. From the press release:

Through MicroPlace’s secure platform, everyday people can purchase investments – for as little as $100 – from microfinance security issuers. MicroPlace also enables investors to direct the impact of their investment to a specific country and microfinance institution in the developing world. The microfinance institutions use the funds to make small loans to the working poor, who in turn use the loans to start or expand small businesses and lift themselves out of poverty.

This sounds suspiciously like the Kiva peer-to-peer lending model, right? At first glance - and before my first cup of coffee has taken effect - it does. A little digging, however, illustrates some key differences between the two.

As P2P Lending News explains, [t]he big difference between MicroPlace and Kiva...is that loans will be securitized (and therefore potentially trade-able), and lenders will earn interest. Unlike Kiva, lenders on MicroPlace invest in microfinance by purchasing securities. Funds generated by these sales are then invested in microfinance institutions around the world. MFIs, in turn, solicit clients, make loans and collect payments - they do their normal day-to-day business.

Once client payments are in, the institutional investors receive their loan (plus interest) who can then pay back their investors - people who purchased those original securities. It's not as simple a model as Kiva's, but its differences are very important.

First of all, Kiva is a non-profit. As Matt and Jessica Flannery have explained, it's very difficult to become a SEC-registered broker/dealer - even more difficult when you're running Kiva from your living room on the nights and weekends. (See pages 37-38 of the Innovations article for Matt's take on this decision.) MicroPlace, on the other hand, had the institutional and financial backing of EBay, allowing it to go through the complex regulatory application process and to put up the necessary money for the SEC to sign off. Upshot: Kiva wanted to be for-profit, but had to stay a NGO because it was a regulatory nightmare to register with the SEC. As a result, lenders on Kiva only receive their loans back - without interest. MicroPlace, as a broker/dealer, can pay interest to lenders - thanks to its ability to navigate the aforementioned regulatory maze.

Secondly, MicroPlace adds a level of intermediation that Kiva doesn't have. With Kiva, lenders provide capital to MFIs, who then lend to clients. MicroPlace is a market for microfinance securities, not just requests for loans. Sure, it takes away some of the intimacy, but for the microfinance industry, it's a big step. Securitizing loans helps diversify risk, and allows microfinance investors to reach into the second and third tier MFIs that are having a hard time raising non-donor money.

Are Kiva and MicroPlace competitors? Yes and no. On the one hand, they compete for lenders and have similar models. (Side note - this competition could get bad if the mainstream media screws up the story here. The differences between Kiva and MicroPlace are important, but subtle. Fingers crossed.)

On the other hand, Kiva is filling an unmet need in terms of providing a direct, peer-to-peer portal on which lenders and borrowers can connect. MicroPlace, meanwhile, is more businesslike - it offers a portal where profit-conscious investors can get involved in microfinance without totally compromising on rate of return.

For more on the MicroPlace story:

How Will EBay Affect Peer-to-Peer Lending? (NextBillion)
BusinessWeek
Reuters
Press release
P2P Lending News
Yuri Gadow