Ebay’s MicroPlace.com is a new site where you can invest small amounts of money (starting at $50.00 and $100.00 in some funds) in a 3rd world country and help individuals start their own businesses and help reduce the rate of poverty there. It’s free market profitable charity? If that makes sense. It is piggybacking on the consumer idea that started with a site called Prosper where individuals loan to other individuals at different levels of risk and get bigger returns than a bank would pay in interest on your money. This is profitable for Prosper because they take a cut of the profit first and then the loan gets its interest. Even with the lender and Prosper’s cut, its still a lot less interest for someone to pay back than payday loans or other super high interest loans.
The idea that small loans (which make interest and are repaid on a regular schedule) to individuals in impoverished countries that allow them to start small businesses has been a popular idea of the past few years. The University of Chicago economist and author Jeffrey Sachs wrote about it in his book The End of Poverty: Economic Possibilities for Our Timein 2005. It was a best seller and landed him on Time Magazine’s 100 most influential people list. Muhammad Yunus also got critical acclaim for his micro lending company Grameen Bank and the Nobel Peace Prize in 2006.
On MicroPlace.com anyone can try to end poverty. You can choose a region of the world and a country and research some statistics about the population there. Then look through an read up on the programs available to invest in. There are risks involved in these investments, like in all investments. These MicroPlace invetsments specifically have these risks you should be aware of before investing:
1. They are not FDIC insured
2. The interest rate is lower than you would get in a bank or an average index fund rate over time. (I saw 2% listed)
3. You can’t purchase these funds in Pennsylvania (it says so on the prospectus)
4. In the investment world the ones who loan the least get the smallest rewards, so $100.00 may do some good, but you won’t get rich from it.
I think these programs have succeeded in their limited trials so far because of a few reasons. They are starting small in areas where this has never been available before. The newness of the opportunity seems huge and people are so excited about repaying because they have never had an opportunity for a loan before. Over time this will wear off if they are available to everyone everywhere and the payback rates will drop. (look at home loan defaults right now in the U.S.) They also don’t have competition in a lot of the new businesses they start, so the success rate is high when no one else has a loan yet or a new business. I also think that Americans are very into the popularity of charity and giving to help poverty right now, and are eager to donate and invest. (sometimes instead of investing in their own 401K plans, paying off credit card debt or donating to communities at home) Over time if rates of return don’t stay high, and change doesn’t happen the popularity will decline also. And lastly the idea that “free market capitalist economies can save the world” is very popular right now. As this expands and shows the pluses and minuses long term (America has a lot of poverty too you know, and no one seems interested in ending it here) may change our thinking. But for now it’s Laissez Faire for everyone.
I applaud Ebay for their efforts, because they are trying to do good while doing business. But, over the long term I think these programs should stay small and primarily offline with more involvement in the venture by the investors to help supply the knowledge needed to make these new businesses succeed. (because money alone can’t create a successful business) Commoditizing this process as an investment opportunity for all is probably going too big too soon and at an unmanageable level and will not return gains on investments or really help end poverty in the long term. (in my opinion)