Monday, September 04, 2006

Thoughts on charity and microcapital lending and Kiva

Several months ago I had read about Kiva - a clearinghouse for international microcapital lending. It seems to be a charitable insitution specializing in collecting loans which are then distributed to various geographies by third party microcapital lending institutions (MLIs).

The idea is quite interesting. MLIs lend to businesses or people starting businesses. Amounts can be very small - $25 up to $25,000. Terms are short 3 months to 3 years.

Kiva vets the MLIs for underwriting performance, criminal / ethical practices, links to terrorists and reasonableness of lending terms.

The MLIs can and do charge interest. One, Prisma MicroFinance, lends at risk adjusted rates. In my book, risk adjusted rates can be fairly high - just look at the high risk rates lent at prosper.

Prisma's site recommends MicroCapital's site for anyone interested in investing in MLIs. They state that investments can be quite profitable, but are done as private placements (high risk, less regulated), rather than through IPOs, etc....

I might follow the MicroCapital blog for a bit to better understand the investment opportunities. Has anyone invested in an MLI yet? Prisma recommends investing in funds that invest in MLIs, rather than investing in one directly.

Here are some thoughts specific to Kiva:

  1. From an altruistic perspective, lending money to a needy entreprenuer is very exciting. There's a 97% chance of it being repaid. You can relend it when the loan is paid back.
  2. As the loan is paid back it is not a charitable contribution - you receive no tax benefit. If the borrower defaults, you can claim it as a capital loss on your taxes.
  3. You may have to wait a while for the loan to be paid back - several months to a year.
  4. The MLI is charging interest and making a profit.
  5. It is unclear to me if you as the actual provider of capital are earning interest.
  6. If the intermediary is making a profit and such firms are attractive investments - shouldn't we as the source of capital also have the opportunity to earn a interest - at least to cover inflation? After all, we are not receiving a tax benefit.
  7. Microlending, is most likely much more effective than blanket funding grants or other methods that give people money. Microlending requires business apptitude, stewardship of resources, the development of private property and encourages sustainable development in third world countries marred with failed socialist experiments.

The benefits of #7 offset some of the issues related to #6. However, my charity budget is much smaller than my investment budget (it may be different in fourty years!). If I could earn a return on microlending, I would have much more money to give.

Prisma described a goal of having microlending established as a clearly defined asset class for investment portfolios with 1% of the world's asset allocation. Noble, but it would be better if it were more accessible.

The right side of the MicroCapital blog details a list of various investment opportunities. Here are some interesting points:

  • Retail funds - ROI ranges from 1.19% - 5.01%
  • Securities (bonds) - Coupon rate varies from 0 - 6%
  • Private - Target ROIs ranging from 2 - 10%

I'd like to learn more about the business and how it works. However, the lack of a tax deduction for loans - after all it's not a permanent contribution - limits how much money I can work with (tax break frees up more cash).

I am very attracted to the idea of helping many third world countries evolve sustainable enterprises. Key questions:

  1. Am I willing to lend money to do good, even if I don't receive a tax or investment benefit?
  2. Is this the most effective channel for charity? Why not establish a donor advised account with Schwab, etc...? You receive an immediate tax deduction and the ability to donate money to charities.
  3. Or is it the issue really one of discomfort - if I'm making a charitable (I know technically not truely charitable) donation - is the MLI's interest generating a profit for lenders other than myself? Is this fair or reasonable? Or merely a carrying cost that I should expect - a return on investment to investors for creating the infrastructure I use?

#3 puzzles me.

Please share your thoughts with me,

Have a wonderful day,


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