Tenacity was always one of Bill’s strong suits. It is that special brand of determination that Penney found very interesting and captivating. Little did she know that he was working hard to try to uncover the truth.
BILL: Hi honey. How was work?
PENNEY: Hey, how was your day? Mine was just a little bit more stressful than usual because of some deadlines but pretty much the same as any other day.
BILL: Sounds exciting.
PENNEY: I know, right? What are you smiling at?
BILL: Oh, I have been doing a little detective work.
PENNEY: Really now?
BILL: Yup.
PENNEY: About what exactly?
BILL: Microlending.
PENNEY: Still not giving up on the idea huh?
BILL: I think that microfinance is still the only way we will get rid of poverty.
PENNEY: Okay, so what you got?
BILL: You know that Ebay microlending site you talked about?
PENNEY: MicroPlace?
BILL: Uh huh.
PENNEY: What about it?
BILL: I have been trying to learn more about it and exactly how it works.
PENNEY: Well like I said it is different from Kiva because it gives you a return on whatever you loan out.
BILL: Yeah…
PENNEY: But they are able to do so because they charge the borrowers high interest rates so the entrepreneur carries that extra burden.
BILL: Actually that is where you are wrong.
PENNEY: Really?
BILL: Yeah I started a correspondence with someone from MicroPlace and I asked them how they are able to give returns when others like Kiva could not.
PENNEY: So you asked them how the funding of loans to MFIs worked?
BILL: Yup, and this is how it was explained to me in an email:
“Yes, you are oversimplifying a bit to say someone must be charged more so investors can earn returns, but I can help clear it up. It goes back to my explanation about the cost of capital for each issuer. Issuers have many sources of capital- donations, below market bank borrowings, institutional investors, equity capital, guarantees etc. MicroPlace to them is just another source of capital. So the interest rate they charge to MFIs is dependent on their overall cost of capital (of which MicroPlace is only one part). Similarly, MFIs themselves typically have various sources of funds, and provide a variety of services, all of which together determines the rate they charge to borrowers. Remember, we’re all about loans to MFIs, not one for one lending, so it follows that the interest rates charged to borrowers do not necessarily correspond to our specific investments/returns.”
PENNEY: Okay, so the way I understand it, issuers are just one place where the MFIs can get money from and they have other choices.
BILL: So it would stand to reason that if the issuers and MicroPlace charge too much interest/burden then they won’t have any MFIs borrowing from them.
PENNEY: That’s the way I am understanding it.
BILL: Yeah I guess that is capitalism at work there.
PENNEY: Oh that brings up good point though. Are all the MFIs non-profit or are some of them for-profit?
BILL: Why?
PENNEY: Well, capitalism is all about making money. If MFIs have access to all this cash from lenders, how do we know that they are not using it to create profits for the business instead of trying to help the poor.
BILL: Well, if they charge too much then the entrepreneurs will go to another MFI. The competition should keep the rates low.
PENNEY: What about places where there exists no competition?
BILL: Hmmm. I’m gonna have to do more research it looks like.
PENNEY: Yeah let me know as soon as you hear something.
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Related Posts:
- Money Talks–CHAPTER 3 (WHY NOT KIVA?)
- Money Talks–CHAPTER 4 (HAVE YOUR CAKE AND EAT IT, TOO)
- Money Talks–CHAPTER 2 (WHY KIVA?)
I need to shape up...
