Microloans Part 1 – What Are Microloans and How Can I Invest in Them?

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Recently, I made my first ever microloan / microfinance investment, using a microfinance site called Microplace.

The loan, at the moutainous amount of $20, was to help finance entrepreneurs in Ecuador with their start-up businesses. These businesses include a diverse array of categories such as water-treatment processing, grocery stores, and clothing weaving.

Furthermore, I was recently reading through an article on Wealth Pilgrim about the subject of whether or not investments in “green” companies should be considered as part of your retirement money or as a donation.

As I was reading this, I began to also wonder how microloans should be treated. Therefore, I thought it would be a learning process for everyone (including me) to investigate some more about this subject.

I will address this subject in two parts.

To start off, we first need to know what exactly a microloan is.

A microloan is pretty easy to understand. It is a loan to poor individuals around the world (mostly in developing countries) to provide them funding for starting their own business.

What makes these loans different than normal loans is that they are typically in small amounts ($30-$200), have to be repaid in weekly installments (this discourages default), and typically have a short term of 3-6 months.

The individual borrowers are charged an interest rate on the loan amount until it is repaid. At the end of the loan term, the individual pays back the money to the lending institution.

Some excellent resources for additional reading material can be found at the links below from Microplace.com and Wikipedia.org.

Microplace.com – How Microfinancing Works

Microplace.com – FAQs for Common Questions

Who offers microloans and how can I participate?

From a personal access point of view, a microloan works as follows:

• 1) You, or another individual that has extra money that he or she wants to invest, goes to a microloan broker. This usually happens through their website. Several common brokers are listed below.
• 2) You perform a search to narrow down what you would like to invest in based on geographic location, investment minimum, and the business type/model.
• 3) The loan note is issued to you through a separate lending organization (not the broker).
• 4) The loan is repaid by the individual in the developing country to the lending organization.
• 5) The lending organization then repays you (including interest) through the brokerage house.

Several of the providers (they are officially classified as brokers and are registered as such) that I have heard about can be found at the links below.

I always like to add a little human element to my postings whenever possible. This helps it keep this blog alive and not be a dry Newsweek article.

Since this was my first ever microloan, I started with a small $20 loan with Microplace.com. I choose this broker because they are supported through eBay / Paypal, two companies I trust.

The loan note was actually issued by the Calvert Foundation. This organization is a non-profit group that issues community (meaning multiple lenders) loans to help fight poverty. Looking at their website, it actually looks like it would be a pretty cool company to work for for finance majors!

The audited financial statement of the Calvert Foundation can be accessed at the link below.

Google Docs – Calvert Foundation – My Microloan Issuer

Details of my loan are as follows:

Since I just made the investment, I haven’t received any interest payments to date.

Tomorrow, we will continue with Part 2 of this series, where we will explore how microloans should fit overall in to your Purpose Focused Financial Plan and overall investment strategy.

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Related articles about microloans at several of my favorite personal finance blogs:

My Money Blog – Microplace Loan Performance

NextBillion.com – When Microcredit Isn’t the First Step