Microfinance class at Robert Kennedy College

Our Investment Management residential week in Zürich, an elective within the University of Wales MBA at Robert Kennedy College, has just ended.

This time I have added a unit on microfinance as an investment and I have asked 4 groups to compare myc4/kiva to professional investments in microfinance like the credit suisse fund.

The results are very interesting…

Kiva is an excellent portal but perhaps it is consider by most investors similar to a revolving donation and certainly not an investment. Myc4 it is not as easy to understand and some dubious projects require more explanation. Additionally on myc4, the provider and lender of the loan (It is not clear thy there are so many actors/commission takers) do take the great majority of the profit with no risk. In an investment environment this is, from a first analysis, might not appear as entirely fair.

Microplace offers a good balance between profit and reasonable risk but so far it is available only to US residents.

My idea was to give to our students a fixed amount of money to lend to a microfinance project – it would cost nothing to the student and carries no risk. But this is only doable if the college establishes a direct relationship with one or more MFIs that can ensure:

I) Entire transparency on how the loan is going to be used;
II) Low or manageable risk of loss of principal;
III) Integrity and no doubt whatsoever on how the money will be used (track record is required);
IV) Takes a reasonable profit, pays an interest to the college and undertakes both currency and default risk.

On point IV I have discussed this extensively on the myc4 forums – It is really impossible for an investor to assess default risk without having full transparent information. Myc4 does provide with information but, as it is not a microcredit concept (too many loans over 10,000 Euro !) it is really far from my understanding. The slogan is to eradicate poverty but, with due respect, I fail to see how a video game arcade will help in this noble mission.

I also fail to see how this business can repay 17000 Euro of interests (!) on a 32,500 Euro loan. This is not microfinance and I don’t even think is, as someone in their forums claimed, the missing middle. This is not the middle. The size of this loan is similar to the one we can see in a developed country like Switzerland, Germany or Italy. If you compare the wanted interest rate with the effective APR you can easily see that the provider/lender takes a great chunk of the profit (the majority) at no risk: they have no currency/default risk and all the risks lays on the investors.

Furthermore, both myc4 and the local provider/lender receive their commissions within the first repayments and do not share the default risk, not even on their commissions. This obviously is a problem: the local provider has little or no incentive in recovering unpaid amounts as their profit has been repaid in the first one or two repayments.

My students were also surprised to see other projects like this and this with have similar pictures and a somehow dubious amount: 10,000+ Euro. The class included two students from Africa: one from Ghana and one from Nigeria (the brach manager of a local bank) and apparently we shared the same doubts on the entity and scope of these loans.

If I want to start a farming business I can easily start with lower capital.

To be clear there are several worthy projects on myc4. They just need to pay extra attention to what providers are posting. Anything dubious might damage their reputation. I am an investor on MyC4 and, despite the doubts on some providers, I do not regret my decision. I have found that their Ugandan projects (perhaps thanks to their local presence) have, in my opinion, an higher quality/motive.

All in all Kiva has a much better screening: only loans up to  1200$ each are allowed and providers with an high delinquency rate are suspended from the platform. It does come with some string attached to the providers (they need to repay monthly and keep journals up to date) but obviously you cannot keep control if you are not well informed.

I am confident that soon there will be a kiva/microplace looks alike for international users. Till then our class seemed to agree on the benefits of professionally managed funds as a sustainable and relatively low risk way to make a social investment.

From my side I am negotiating with three MFI (from Samoa, Gambia and Cambodia) for a small interest bearing loan done by the college in behalf of our MBA students. Hopefully this will allow us to display some concrete profiles and let the student decide where their credit of 25$ (given by the college as a gift to the student) should go.

The difference with Kiva is that we will be receiving a small interest AND not overwhelm the MFI with honerous information and repayment requirements (e.g. we can give a loan for 1 year without asking for monthly repayments). Of course this won’t be for a big amount but it is certainly a start.

The MFI in Gambia doesn’t have a website so perhaps I will host some page about them on this website, This might help them in receiving more loans and/or donations.

For non-RKC students I feel that Kiva and Microplace are currently among the best alternatives.

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