Entries in lendforpeace.org (2)

Tuesday
Jul072009

Five things to ask yourself if you are interested in social lending

There is significant buzz around the concept of social lending these days. From the dramatic re-opening and prompt re-closing of Prosper Marketplace, to the calm (and dare I say bank-like?) steady returns of Pertuity Direct, mainstream borrowers and lenders across the spectrum are wondering whether social lending may be a legitimate pursuit. But who is it for? Is it an alternative reliable source of returns for investors? An option for borrowers who seem to have no other options? A platform to lend to the working poor around the globe? A risky, high-payoff avenue for lenders? A way to feel good about helping people reach goals that you support?

The truth is that social lending is an incredible diverse market space. If you’re thinking about entering the social lending sphere, ask yourselves these questions to know which platform may be right for you:

  1. What originally drew you to social lending? I see three main classes of people interested in social lending: 1) Investors looking for an alternative return stream; 2) Idealists looking for a concrete, high-impact way to contribute to social good; and 3) Casual lenders intrigued by the possibility of cutting out the bank to earn returns and create a more transparent financial experience. You should know immediately which type you are—investor, idealist, or casual lender—and your options will narrow considerably based on these goals.
  2. How much personal connection are you looking for? As the term “peer-to-peer lending” has evolved to the broader “social lending”, some sites are moving away from the direct p2p connection. Pertuity Direct, for example, has very consciously tried to move to the mainstream lending market by relegating the typical “borrower profile” to an optional community page. Instead, lenders buy into a pool of borrowers of a given asset class. This approach is excellent from an efficiency standpoint—no need to browse through profiles to try to create your own diversified portfolio—but the lenders looking for the feel-good sensation of getting to know your borrower will be disappointed. Lending Club offers the more traditional profile-browsing approach which gives you a direct connection to your borrowers. On Kiva and Microplace, you choose a microfinance institution who finds individual micro-entrepreneurs according to filters—in your chosen country, target demographic, etc.—whereas on LendforPeace, the entrepreneurs are all Palestinian. Through Virgin Money, you simply formalize deals with people you already know; no new relationships are gained, rather the site creates the framework to help prevent existing relationships from deteriorating when they are complicated by a financial bond. The latest entrant Unithrive connects Harvard alumni with current Harvard students – the possibility for a durable bond between individuals is there with both the financial and university connection.
  3. How much risk are you willing to take? Initial challenges with high default rates when the p2p lending space was in its infancy led to many charges that borrowers on these platforms are an adversely-selected population and lending is risky business. The industry has made great strides since then and has instituted far more stringent borrower requirements, but the risk factor is still relevant. Pertuity Direct and Lending Club are the only two companies that are registered with the SEC, so if the government’s blessing matters to you, your options are quite limited. The international microfinance sites have very low default rates (1.7% on Kiva). Pooled lending, like on Pertuity Direct, achieves the highest rate of diversification, but if you’re willing to accept the risk, you can choose borrowers paying a higher interest rate based upon their profiles at Lending Club. Prosper is still shut down, but many early lenders were burned on the site – often due to their own lack of judgment, but an issue nonetheless.
  4. Do you want to make money? At Kiva and LendforPeace, p2p microfinance sites, you earn no interest, but the sites offer a high-impact way for you to park additional money (as little as $25). At Microplace, you can earn up to 6% interest (although most investments fall more in the 1-3% range). At Pertuity Direct, the average interest rate is around 13.4% (minus fees). Lending Club claims a 9.05% average annual performance.
  5. Are you interested in a particular cause? Many sites target very niche markets. If you are appalled by the usury of payday lending, check out alternative Yadyap (“payday” spelled backwards). Passionate about education financing? Look into People Capital or Unithrive. If you are looking to provide economic opportunities in Palestine, LendforPeace is your site. To help mainstream American families, Prosper and LendingClub are the best known.
Monday
Apr132009

LendforPeace, a p2p microfinance platform for Palestinian entrepreneurs, has early success

A new p2p lending site connects lenders to micro-entrepreneurs in the Palestinian territories. At LendforPeace.org, lenders can make a loan directly to vetted borrowers in the West Bank and through this process, the site hopes to help "humanize the conflict" and give its users a more personal view of the Palestinian experience.

At LendforPeace.org we aim to tie the power of microfinance to the notion that economic stability is a necessary component of a lasting peace between Palestinians and Israelis.

West BankIn an discussion with me last week, co-founder David Fraga explained why LendforPeace.org is an important complement to Kiva: It reaches people who might not be drawn naturally to microfinance, but who are interested in conflict in the Middle East. The niche focus allows a different lender population to be targeted.

LFP has also introduced an innovative option not currently enabled at Kiva. Lenders can donate money to a Revolving Microfinance Fund. By allocating the money here, your money is immediately re-loaned to another worthy entrepreneur. Mr. Fraga explains that this is an important step forward in efficiency; large sums of money invested in Kiva are currently "dead capital" sitting in lenders' accounts yet to be withdrawn or re-loaned. Also, unlike any loans made to entrepreneurs on Kiva, your contribution to the revolving microfinance fund is tax deductible in the US.

A very real concern for lenders investing in entrepreneurs around the globe is uncertainty over whose activities they are funding and whether the money is going to the intended place. In our discussions with Mr. Fraga, we are convinced that LFP has a very robust due diligence process in place for the MFIs with whom they partner on the ground and the micro-entrepreneurs:

  • Government vetting. Both partner MFIs of which have been vetted by USAID and comply with the US State Department's antiterrorism clause.
  • Financial vetting. The MFIs are also regularly audited by the accounting firms PricewaterhouseCoopers and Ernst & Young to ensure responsible financial practices.
  • LFP vetting. LFP also sends its own personnel to audit partner portfolios and to perform site visits with current and prospective borrowers.
  • MFI vetting and risk sharing. The local partners perform extensive due diligence on each lender and they match each loan or sign a risk-sharing agreement. This ensures that that the MFIs have aligned incentives with LFP lenders.

While the founders are focusing on the core functionality of p2p loans currently, they have exciting ideas for where to take the site in the future. An e-commerce capability would allow lenders to directly buy the goods created by their borrowers, for example, if an entrepreneur is an artisan. A discussion section would allow borrowers and lenders to communicate directly, and other interested members of the community to join the discourse.

LendforPeace.org is supported by grants from the Clinton Global Initiative, Ashoka Youth Venture, Davis Projects for Peace. The site was launched in February and Mr. Fraga was just interviewed by Fox Business News and the newscasters were practically gushing. As he argued in our discussion with him, "we [the founders--two Jews and two Arabs] may not agree about much, but it's hard to disagree with the concept of economic development and that people shouldn't be poor." LFP offers a tangible and transparent way for those who are touched by the Middle East conflict, but feel frustrated that it is beyond their reach, to play a small and constructive positive role in the process.

Flickr credit: hazy jenius