I just ran across MicroPlace and thought wow, that’s a great concept.  You give them money and member institutions lend it out to emerging market entrepreneurs. You get to see pictures of the people in third-world countries who receive the loans. It’s an eBay Company so it has the air of legitimacy, although I have some doubts after delving deeper into their business model.

MicroPlace is similar to Prosper (which Matt wrote about here and here); Prosper is a general lending program available to everyone in the United States.  These people have many reasons to borrow money: house financing, credit card repayment, boob jobs, etc. After making a loan, you can expect a 6 - 20% return on your money.

With MicroPlace you are investing in entrepreneurs in emerging market countries.  Interesting idea. Looking at a list of the countries on MicroPlace, I found Azerbaijan, Cambodia, Soviet Georgia, Ghana, Kyrgyzstan and many others. You can drill down and see the pictures and profiles of the entrepreneurs. (Don’t worry, I’m sure the guy from Ecuador isn’t actually in a jail cell.)

If you choose to invest your money goes to a lender like Oikocredit-USA or The Calvert Foundation.  These institutions in turn lend your money to the people in the region you designate. You can dig down into each loan offer and actually see the individuals you will be loaning money to.  You can read their backgrounds and profiles and see what they plan to do with the money.

So far it looked pretty good, so I dug through the FAQ’s and Help.  The FAQ’s are spread out quite a bit so you have to dig for them.  I was trying to find out what interest rates are charged to the borrower.  Here is what I found:

…Interest rates charged by lending organizations vary by country and range between 18 and 60 percent…

Okay, I guess I would expect these people to pay a pretty steep interest rate.  They are in an emerging market with political instability, currency problems, corruption etc. And it’s not too much worse than what US credit card companies charge now.

So then I thought, if they are paying 18-60 percent, what do I get?  Going to the list of places I can invest was not what I expected. If I lend money, I get anywhere from 1.5% - 3% annually.  Obviously, I must be backing the loan and the institution is guaranteeing it for me.  According to this FAQ:

…investments available on MicroPlace do not provide guaranteed returns…

I am not guaranteed against downside risk.  I did find this little tidbit though:

The risk of your investment is directly related to the financial condition of the security issuer… the issuer maintains certain reserves to ensure repayment to investors, even if underlying borrowers fail to repay their loans. However, these reserves may not be adequate to meet all potential losses…

Bottom line, this money is at risk. So I am the one taking the financial risk not the institution doing the lending.  I would expect the institution to make maybe 3% and the rest should come back to me.

This led me to start thinking in terms of charitable donations, could this be tax deductible? According to the FAQ:

…investment is not tax deductible since you are purchasing a securities product…

So you want me to lend money to an emerging market entrepreneur and make less than I can in my FDIC insured savings (currently 4-5%)?  Not a chance. Add to that that the income from the loan is taxable to me and it’s pretty much an all-around bad deal.

Somebody is getting a pretty good deal but it’s not the investor or the entrepreneur.  These institutions are loaning money out at 18 - 60% and only paying 1.5 - 3% to do it.  That’s a pretty attractive spread, especially when you consider that the lender (me) is taking a big risk and getting very little reward.

This is supposed to help those in the emerging markets finance small businesses to make their life better.  I would even say it would be good thing if the institutions were charging 5-6% on their loans, then it feels charitable.  It seems to me that the lender (me) and the borrower are getting a pretty raw deal. If you really want to help, donate money directly to the lending institutions at least then you get a tax write off.

I want to reiterate, it’s not that I am cold and I really do get the social impact of the loans and all.  But if you want it be an investment then it should come with an appropriate risk/reward curve.  If you want it to be charitable then make it charitable.  Don’t make it look like an investment with less reward than a charitable donation.