MICROCAPITAL PAPER WRAP-UP: Microfinance Managers Consider Online Funding: Is it Finance, Marketing, or Something Else Entirely? by Deborah Burand

Written by Deborah Burand, published in April 2009 as Focus Note Number 54 by the Consultative Group to Assist the Poor (CGAP), 12 pages, full text available at: http://www.cgap.org/gm/document-1.9.34243/FN54.pdf

As online platforms change the way we engage with the world, online philanthropy and social investing are changing the nature of how and where people give. In this CGAP Focus Note, Deborah Burand explores the growth of online lending and investment platforms – websites that lend money raised from internet users to microfinance institutions (MFIs) that, in turn, onlend to microentrepreneurs listed on the site – and highlights issues that MFIs may want to consider before signing up for a loan online.

While Kiva.org is one of the best known online lending and investment platforms, with over 350,000 “Kiva Lenders,” the number of platforms focusing on microfinance is growing. Some other highlighted sites include Babyloan, dhanaX, GlobeFunder India, MicroPlace, MyC4, myELEN, Rang De, United Prosperity, and 51Give.*

Online lending and investing platforms may seem like a great option for MFIs seeking capital, offering significant amounts of funding at highly subsidized interest rates, however there are many questions MFIs should ask when considering attracting funds through such platforms.

Which online platform can be counted on to provide funding in the amount and at the time when needed, and what additional support do they offer to the MFI? MFIs must look at the motivations of online lenders when considering the reliability and stability of online lending and investing platforms. For example, socially motivated investors may be a more dependable source of funding than investors seeking a financial return who shift from microfinance to other types of investments or shift among online platforms as they race after financial returns.

What is the cost and currency of the online funding? And, if there were a significant foreign exchange event, who will bear the risk? Currency risk represents a significant potential cost to MFIs, as many online platforms lend in the currency of their lending community. The global financial crisis has led to large swings in many currencies, and the possibility of currency control poses significant risk to MFIs. While the online lending platform may be the party best equipped to manage foreign exchange risks, few platforms have taken on this responsibility. MFIs themselves must take concrete action to mitigate these risks.

How will the online lending or investment platform help its MFI partners manage abrupt and perhaps unpredictable shifts in the funding patterns of its online platform? While the amount of online financing available to MFIs is quickly growing, this funding is not unlimited nor is it necessarily stable, especially in the current economic environment. However, many see online lending and investment platforms as a “lender of last resort,” with the sheer number and diversity of lenders and investors providing counter-cyclical stability.

How do other, more traditional, lenders to the MFI view the MFI’s borrowing from online lending platforms to meet loan capital needs, particularly if the MFI faces times of distress? As more of the debt available to MFIs is channeled via online lending platforms, traditional lenders may have concerns about the currency, short duration, and refinancing risks inherent in current online lending products. In particular, traditional lenders will consider how well online lending platforms will cooperate and negotiation with other lenders when an MFI faces financial difficulties.

What are the reporting requirements that online platforms will require from the MFI? And what are the operational and cost implications of these reporting requirements for MFIs? Many online lending platforms use profiles of microentrepreneurs to enhance the personal connection between lenders and borrowers, and MFIs sourcing this funding must hire staff or consultants to develop and update these profiles regularly. MFIs will have to evaluate how easily it can meet these reporting requirements, both in terms of cost and technological capability to meet and manage the data needs of that platform.

What customer privacy and consumer protection concerns with respect to the online lending platform should MFIs have about posting online stories on microentrepreneurs? Increasingly online lending platforms are aligning themselves with MFIs to balance the information needs of the lending public with privacy needs of borrowing microentrepreneurs. So far, three online lending and investment platforms— Kiva, MicroPlace, and MyC4—have endorsed the Client Protection Principles recently agreed by more than 40 of the world’s largest microfinance investors.

What due diligence does the MFI need to conduct to satisfy concerns of regulatory authorities about money laundering and terrorist financing? MFIs are facing increasing requirements to perform due diligence of prospective funders, as well as their customers, under the rubric of anti-money laundering and combating the financing of terrorism (AML/CFT) regulation. As the precise source of funds on online lending platforms is not always clear, MFIs must rely on the platform to perform adequate due diligence.

The well-publicized successes of platforms like Kiva and MicroPlace are likely to generate a surge in new online lending platforms aimed at microfinance. However, in this CGAP focus note, Deborah Burand argues that MFIs should view online borrowing not just as a marketing opportunity, but as a serious funding decision.

By Jaclyn Berfond, Research Assistant

*Although not mentioned in the CGAP Focus Note, Opportunity International’s OptINnow is another example of an online lending platform. Read more about OptINnow in this MicroCapital story.

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