How to Invest in Microfinance Institutions
Microfinance, usually called microlending, is a practice of loaning small amounts of money to business people, farmers and entrepreneurs. Originally developed to give capital to less developed parts of the world, microlending is now available in the United States. Investing in microfinance institutions has become much easier with the advent of web-based investing. Although it is not common, some sites allow you to charge interest on your portion of a microloan. Although most sites have a minumum lender amount of $25, some allow you to invest smaller amounts. These small amounts are aggregated to fill the larger loan amount.
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Instructions
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Review the different web sites that facilitate microfinance. Sites are based on different models. Some sites only accept donations, and then allow you to lend those donations to borrowers. These sites may or may not allow you to withdraw the donation at a later time, depending on the finances of the organization. The second type of site allows you to buy "credits," which are usually dollar denominated. Those credits are then lent, with repayments crediting back to your account. Those credits then can be lent again or withdrawn.
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If you are interested in investing, instead of donating, select sites that offer interest on your loan amounts and also offer withdrawals in the form of PayPal or check.
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Register with the site.The process will vary, depending on the microfinance institution you select.
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Fund your account. This is done either via PayPal or credit card, depending on the institution.
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Review loan requests. This process will also vary greatly, depending on the institution. Some institutions, like Kiva, offer detailed historical statistics on their lending partners to help minimize risk. Those statistics include default and delinquency rates. They also include the interest rates and field partner profitability percentage. By selecting field partners with low or non-existent default and delinquency rates, you can reduce your risk. By selecting field partners who are profitable, you reduce the risk of the field partner folding with outstanding loans.
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Select a loan or loans to fund. By spreading your loan portfolio across many different geographical regions and field partners, you can reduce the risk of loss due to political or financial instability.
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Fund the loans by following the procedure for your institution.
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Tips & Warnings
Most microfinance and microlending sites rely exclusively on local banks or field partners to qualify borrowers and check local credit reports. How much information you will be able to see about the bank or field partner will depend on the site.
If you are investing, rather than donating, be sure the site you select has the facilities for you to withdraw any available repayments.
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