Almost a year ago I was telling my family about this great idea I had for a new micro finance design. For anyone who doesn’t know, microfinance institutions are designed to provide credit and financial services for people in extreme poverty. The movement began with micro loans which gave small sums of capital to individuals in developing countries to start an income generating business. Because there are no ‘credit scores’ (or method for evaluating risk) for these regions, financial institutions had been unable to provide loans. However the revolution came by substituting social capital for financial capital to guarantee the loan. Specifically, loans are issued to individuals in groups who are then all obligated for the entire amount of the loan. Thus if I’m a loan recipient and my business fails or I just take the money and leave, then the rest of my group is obligated to pay the amount before they can receive any higher loans. Coupled with social marketing programs these institutions have blown up in the last decade. In some cases the limiting factor in expanding these programs is the capital. I purposed, to my family at least, that there should be a micro finance bank that had all the standard on the ground operations but generating loan capital by connecting the local recipient population with individuals in wealthy countries through the internet. There by a individual with a little money to invest could get online and loan the money directly to a business in the developing world. This helps solve the shortage of capital, but more importantly creates a feedback cycles where western consumers are financially encouraged for assisting people in poverty. For a long time the closest thing i could find was Kiva, which allows basically this idea except the critial part where investers earn a return. In Kiva’s model, the individual makes a loan and receives full repayment a year later, but without any interest (with the current trend in the dollar and inflation is actually a net loss of the investor).

Well my friend called me this weekend and told me he found my company, how sad. MicroPlace does exactly this idea and interests rates vary between 1-4%. The company is dedicated to expanding access of microfinance from the current 113 million people to 1 billion. The website is very clean, easy to use, and the best part is that its owned by ebay! Talk about aligning interests. I still think there would be a huge benefit in higher interest to lure people away from guaranteed return investments (government bonds). The logic goes further, why not an international bank that places the majority of its investments in microfinance loans, (diversified across countries sectors ect obviously). The bank can offer the standard services for its clients but vary its investment strategy. When bank patrons put money in their checking or savings accounts, that individual is passively provided poverty relief. While large banks already have some capital in micro finance banks the level of investment is dwarfed by say the investments in subprime mortgages. Here is a great article about the MicroPlace, their goals and experience. Right now there is approximately 22.4 billion invested globally in micro finance institutions. This works out to be about $200 invested per person served. If MicroPlace even comes close to the ten fold increase, ebay is in store for a billion dollar cash flow. Longterm, this seems like a pretty killer strategy that integrates the publicity of a major online retailer, easy of efficient online payment, and huge benefits of micro finance.