Interest for Change - The Microfinance Capital Market

Interest for Change is an online platform that connects social investors with microfinance institutions.

How it works

A typical business transaction via the Interest for Change online peer-to-peer lending platform would encompass three steps:

Firstly, microfinance institutions can submit a request for a loan of an amount defined by themselves, while at the same time indicating the maximum interest rate they are willing to pay. Loans can range from USD 2,000 to USD 100,000. The institution's request is posted on the Interest for Change website together with the profile of the microfinance institution. The maximum amount an institution can borrow is determined by the Interest for Change due diligence process and is low until a repayment history has been established.

Secondly, lenders can bid on the loans, either granting a loan in accordance with the suggested interest rate, or offering a lower one. They do not have to commit to the entire amount, but can commit as little as USD 100. Every loan has a submission time of one month. After one month, the money is lend from the investors who offered the lowest interest rate. Another possibility available to the lender at this stage is automatic diversification across microfinance institutions selected by Interest for Change or from objective criteria by the lender. Thus a larger loan amount will be distributed to a number of microfinance institutions.

Thirdly, the borrowing microfinance institution starts paying back the loan. The paying back history of the microfinance institution is monitored and displayed on the website. After the last installment is paid back, the lender can give comments on the borrowing microfinance institution. The repayment history is recorded and displayed on the Interest for Change website as a source of information for future transactions.

Customers
Investors can be both privates and institutions, but the target investors/customers are microfinance equity funds who wish to diversify their portfolio. The market for commercial investing in microfinance has grown 233% during the last two years, according to CGAP, a consortium of private and public donors in microfinance based at the World Bank. Presently, the average loan size in the sector is USD 1m and transaction costs are high.

Background
Interest for Change uses the horizontal structure known from other online lending schemes like zopa.com and prosper.com as a means to raise funds and increase transparency in microfinance lending.

Income is generated by fees on borrowers, for example a 1% fee paid up front by the microfinance institution.

The advantages of Interest for Change are:

- full transparency in lending and performance.
- price differentiation according to institutional performance.
- possibility for small and medium microfinance institutions to borrow small amounts.
- very low transaction costs.

Value proposition for social investors
Social investors, such as microfinance investment funds , can diversify their portfolio and maximize their development impact by lending through Interest for Change. Advantages are:

- Access to small and medium-sized microfinance institutions. Previously it has been impossible or too expensive to invest in this type of microfinance institutions.

- Diversification of investment portfolio. By lending to many small and medium-sized microfinance institutions at a time, investors can diversify risk across institutions and countries. Furthermore, credit histories and information on microfinance institutions' portfolios will make it possible to choose between high risk-high return and low risk-low return profiles.

- Maximize social and financial returns. Investing in small and medium-sized microfinance institutions has a high social and financial return, due to the potential for scaling and the high degree of outreach.

Value proposition for microfinance institutions
Small and medium-sized microfinance institutions get access to capital to help them develop. Advantages are:

- Access to capital. Small and medium-sized microfinance institutions cannot borrow on international or domestic market. International markets offer too large loan sizes and domestic markets have comprehensive collateral requirements.

- Introduction to the commercial market. Early access to a commercial market for capital will encourage the microfinance institutions to develop sustainable business practices at an early stage.

- Individual interest rate according to microfinance institution performance and credit history. The reputation and auction systems allow both young and more mature microfinance institutions to gain access to capital at an interest rate set on the basis of performance and credit history.

Marketing
After a successful pilot phase with key actors, costumers will be reached through microfinance e-mailing lists and publications as well as through networking.

Competitors
For private investors, the main competitors are Kiva.org and perhaps microplace.com, which is not yet established.

Kiva
Interest for Change complements Kiva rather than compete with it. It complements because it offers a financial return and thus attracts individuals with a less social agenda than Kiva, which give zero percent interest (and thus a negative real interest rate). Moreover, Kiva provides information on an individual basis, whereas Interest for Change has a distinct institutional focus. Lending decisions are taken on the basis of institutional information and institutions are the recipients of loans.

Microplace
As for Microplace, they will offer investments in securities, if the current information is correct. This will provide cheaper capital to larger microfinance institutions, but also here Interest for Change will be complementary because it targets small and medium-sized microfinance institutions, who will not have the capacity to handle securities.

Institutional investors
For institutional investors, there are plenty of microfinance funds who invest in microfinance. Some of these are:

- Dexia Microcredit Fund (BlueOrchard).
- responsAbility Global Microfinance Fund (responsAbility Fund).
- MicroVest I, LP - Subordinated Debt.
- Oikocredit World Partnership Investments.
- Fond Internationale de Garantie (small, but targets SMMs).

These funds are more likely to be costumers than competitors because they lend large amounts (USD 100.000+) to a few large microfinance institutions and thus can have an interest in diversifying their portfolio and outreach.

Some of the clients in the above funds might wish to use Interest for Change because of the higher financial return, transparency and flexibility in selection criteria for their investment. For example, a commercial bank might choose to invest in microfinance institutions in its target markets instead of in a broad microfinance fund.

Key Risks
Exchange rate risks. Demand is in local currency, lending is in USD/EUR, which creates both currency risk, transfer risk and convertibility risk. Possible solutions: Hedging in capital markets, diversification and/or partnership with The Currency Exchange Fund, The Netherlands (Yet to be established) or a similar institution. More knowledge is needed.

Regulatory issues. Financial transactions are highly regulated in most countries. One possibility is to operate only as a mediator, like zopa.com. More knowledge is needed.

Other issues to think about. Connectivity in remote areas, usability, money transfers, marketing etc. etc.

Interest for Change offers loans targeted the needs of small and medium-sized microfinance institutions. For investors, it offers comparably low administrative costs and with high financial returns. Moreover, it offer full transparency over the investment portfolio for each individual investor.

No other platform bridges the cap in this unique market.

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If successful, Interest for Change could significantly scale up microfinance to reach a very large number of poor people compared with the present state of affairs, where 100 million poor are reached. By reaching perhaps another 10 million of the poorest, Interest for Change will contribute to poverty reduction, reduction in vulnerability, better health and better education for 50 million poor people as around the world when children and families to the recipients are included. Counting in the dependents and families, who will benefit, the number is likely to be three times as high.