5% Returns on Microcredit Loans?

Yesterday’s announcement that Microplace.com would begin offering a microfinance investment opportunity at 5% is truly noteworthy, as it represents the best returns on a microfinance fund yet. To make this announcement in our current financial context is even more astounding.

Microplace Straddles Two Worlds

Since its inception, Microplace.com has attempted to carve out a distinct niche in the P2P lending field.  The appeal of Microplace.com is that individuals can grow their investment while contributing to the greater good. It offers a financial and a social benefit.

What has hampered the growth of Microplace.com–which has been steady but never strong–is the “for profit donut hole”.

The For Profit Donut Hole

Microfinance investors can be split into two categories: socially motivated or financially motivated. The socially motivated are looking to get the highest social premium on their investment as possible: How many people can I touch with this loan? Will this increase access to education and healthcare for the community? Kiva is an ideal portal for the socially motivated because it allows them an intimate and ongoing connection to the development work that they are interested in. And Kiva does a great job telling the story of both the borrowers and lenders.

The financially motivated investor is looking for monetary returns on their investment in microfinance, even if they’re slightly below market rates. For large scale investors, the Calvert Funds or other microfinance investment vehicles provide a means to invest large sums of money in microfinance for a fairly good return. 4% and up in recent years.

Unfortunately for Microplace.com–which provides a portal for non-institutional investors like you and me to invest, make money and do some good–their rates of return have been luke warm. While they can’t wear the mantle of the socially motivated do-gooder (they are in this to make money, after all), they also haven’t been able to reach a high enough threshold to attract the financially motivated. They are stuck in the donut hole.

Why Hasn’t Microplace Taken Off?

Yesterday’s announcement changes all that. At 5%, Microplace.com is now offering a 24 month investment that beats a 24 month CD you could get at your local bank. It seems to me that it now comes down to marketing, since they are offering a great product.

I will continue to watch Microplace’s metrics to see if they do in fact hit an inflection point in their growth as a result of this new offering. My guess is that they will.