eBay enters microfinance and gets critique

Last week, eBay announced, or at least declared, that they had bought MicroPlace, an online peer-to-peer market place for microfinance investments. MicroCapital is worried that more risky capital in microfinance will make the quality of the institutions go down. Are they right? That depends on where and how the funds go. If the funds are placed without regard to institutional performance and are targeted toward the same large and secure MFIs, which get most of the funds in microfinance today, then it’s probably not a good idea. But if MicroPlace can figure out a way of reaching the small and medium-sized MFIs, and at the same time doing it on the basis of reliable information about their performance, then the critique is probably not as justified. As I describe below, they will most likely focus on the large MFIs, just like the others. I have drafted a suggestion for doing things differently in a business plan on another market for capital in microfinance: Interest for Change. So far, that’s just an idea, so bold comments are very welcome.

More on the eBay/Microplace story below.

The news has been circulated widely in the microfinance community, but mostly just with repetition of the original quote from Auctionbytes, which in itself was interesting enough: It wasn’t actually an announcement, just a side comment in a “town hall” event. Today, however, MicroCapital, a blog on the commercial investment in microfinance, gave et a serious critique of eBays involvement and MicroPlace. He writes:

Given the high stakes involved and the prevailing problems of usury, the introduction of MicroPlace is worrying as it means lowering the bar to capital participation. A mass-market online forum for offering microcredit will open the door to anyone. It is already difficult enough for ‘sophisticated’ dollars to make the most effective and efficient investments in microfinance, so what happens if ‘unsophisticated’ capital joins in? The inevitable price distortions which will be driven by a mix of people bidding up prices when they don’t care about commercial returns and those who are trying to make a sustainable and profitable investment can only inhibit progress towards a serious market, which the risk-based credit model of microfinance has made over recent years.

What exactly will MicroPlace be doing? That’s difficult to figure out. They will offer investment to privates in securities issued by microfinance institutions, according to their website. Or by Calvert, one of Americas largest social investors, says Symbiotics, a microfinance investment mediator.

MicroCapital is worried that the influx of capital will create the same kind of disbursement pressure, which is know from donors, where the performance measure is to get rid of funds quickly. This certainly “lowers the bar.” But a recent report from MicroRate, the leading microrating agency, showed that while there might be an abundance of capital with the large MFIs, there is probably scarcity with the small and medium-sized MFIs. The only two actors currently lending to this group of MFIs is Kiva.org and Fond International de Garantie (FIG). FIG still has limited funds available. And investments on Kiva are based on the stories of the individual borrowers, not the institutions. Furthermore, their transaction costs are still relatively high; they estimate it to be $4.38USD per business for the MFI in an article in the MicroBanking Bulletin #13. On this basis, I drafted an alternative model: Interest for Change. That is just an idea is underlined by the fact that I have considered neither regulatory challenges nor the foreign exchange risk problem. As mentioned, comments are welcome.

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One Response to eBay enters microfinance and gets critique

  1. Ebay Business On Squidoo

    In essense, ebay business is highly profitable if you what to do

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