EBay: The Place for Microfinance

Wednesday, October 24, 2007

On the online auction giant’s new MicroPlace site, investors can lend as little as $50 to would-be small business owners around the globe.

By Catherine Holahan

Tracey Pettengill Turner doesn’t want to give handouts to poor people. But she does want to make investments in them. So on Oct. 24, Turner is launching MicroPlace.com, a Web site that lets small investors provide low-interest “micro” loans, of $50 or more, to would-be small business owners. Her hope is to create sustainable economic growth in the world’s most impoverished communities?and do her part to expand the reach of the microfinance industry to more than 1 billion people worldwide, from about 100 million people currently.

Turner’s outsized ambitions are backed by an equally formidable player. Internet commerce giant eBay (EBAY) acquired the company in June, 2006, for a small, undisclosed, sum when it was little more than Turner and her business plan. MicroPlace benefits from the lessons eBay has learned working with the millions of small business owners and consumers who buy and sell on its family of sites. PayPal, eBay’s online payment service, will process the loans free of charge. “There are a billion people in the world who are self-employed, hard-working, and poor, and we are hoping to scale the industry to at least a billion,” Turner says.

Principal Plus Interest

EBay is no stranger to microlending. The company’s founder, Pierre Omidyar, and his wife, Pam, have devoted hundreds of millions of dollars to microlending through their foundation, the Omidyar Network. The network is the lead investor in Unitus Equity Fund, an $8.5 million microfinance venture investor that finances projects in Asia and Latin America. Pierre Omidyar also gave a $1.4 million grant for the development of software that helps microfinance institutions collect and organize data. “Microlending is just a good fit for eBay,” says eBay spokeswoman Catherine England. “It really leverages eBay’s areas of expertise to address what we see as an emerging market.” Omidyar is also an investor in Kiva, a microlending site run by former TiVo (TIVO) executive Matt Flannery and former PayPal executive Premal Shah.

The key to microlending, says Turner, is that it fosters self-reliance and, eventually, sustainable economic growth in a way that charity does not. What’s more, lenders stand to receive small financial benefits in the form of interest, which should encourage them to keep investing in other projects. The minimum investment for someone to get started on MicroPlace is $100, though subsequent investments can be as low as $50. Interest rates vary between 1% and 4%, depending on the amount and nature of the investment, says Turner. Investors receive a “You’ve Got Cash” message on the site when they see returns. “The intention is that you get your principal back with your rate of return,” Turner says. “The goal is to reach the everyday investor.”

MicroPlace cannot guarantee that lenders will make back their principal, much less the interest, but microlending experts say recipients of microloans have a solid track record on repayment. And MicroPlace is working with organizations on the ground in impoverished areas to identify loan candidates who have the potential to start businesses capable of changing family fortunes and creating new employment opportunities in their communities. The site works with the Calvert Foundation, a nonproft that has worked in community investment for 10 years, and microfinancier Oikocredit, which funds nearly 500 projects, ranging from a cassava processing plant in Ghana to small loans to entreprenuers in Bolivia. As the site grows, it plans to expand its partners.

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Source: BusinessWeek (link opens in a new window)