eBay Enters Microfinance, Part 4 of 5: The Road to Oz, From a grant-making Foundation to an investing Network

Mr. Omidyar has a reputation for meticulously approving every deal at Omidyar Network, but from the outside, it appears that they are trying to master the fields of “social enterprise investing” and “microfinance investing” simultaneously. These fields maybe too big a mismatch and the scope too big for the $400 million dollar Network and yes, even, eBay.  

In Silicon Valley, the social enterprise investing done by the Omidyar Network is a good fit.  Green “cleantech” and social networking companies make sense. We heartily and sincerely applaud this focus and the innovative blending of commercial and philanthropic strategies. Microfinance, however, while not rocket science, is different.

Microfinance investing is different from rich world social investing for many reasons (poor countries, little technology, uneducated customers, etc, etc) but one aspect is more important than all others: Microfinance investment potentially involves subjecting poor people in miserable countries to usurious interest rates and sinful debt. 

Yes, usury is the ugly side of microcredit.  That same poor smiling mother whose photo greets you from glossy photos may well be paying 80% on her microloan. Although the extent to which microfinance creates wealth for its customers is of some contention, one thing we do know beyond any controversy is that interest rates on micro-loans can be very high.  As the New Yorker magazine reported, Compartamos, a darling in the microfinance world, will enter the public markets having charged over 80% annual interest rates to Mexicans.   

Usury is a well known dirty secret in microfinance, yet every time we write about it we receive incredulous letters from readers.  We continue to talk about usury because it is the best way to remind ourselves that the stakes in microfinance are extremely high. Microfinance is indeed a matter of life and death because if done wrong, it can directly mean starvation to a family.

Given the high stakes involved and the prevailing problems of usury, the introduction of MicroPlace is worrying as it means lowering the bar to capital participation. A mass-market online forum for offering microcredit will open the door to anyone. It is already difficult enough for ‘sophisticated’ dollars to make the most effective and efficient investments in microfinance, so what happens if ‘unsophisticated’ capital joins in? The inevitable price distortions which will be driven by a mix of people bidding up prices when they don’t care about commercial returns and those who are trying to make a sustainable and profitable investment can only inhibit progress towards a serious market, which the risk-based credit model of microfinance has made over recent years.

Mr. Omidyar, we return to our refrain in this series: Please get it right.  Silicon Valley is fascinated by technology-driven social networks and peer to peer marketplaces.  Applying this golden rule of the day to microfinance, however, is not enough.  By “massifying” microfinance investment through eBay, Mr. Omidyar, the elephant in the room has sat in your lap.  

The last thing microfinance needs in this frenzy is more uninsured dollars. Whether it is the basket-weaver or her microbank, borrowing in dollars is dangerous. Mr. Omidyar, you know this all too well. Furthermore, enticing more speculative capital to microfinance is another additional risk. What microfinance really needs are equity investments of long term, stable and committed capital.  Microfinance after three decades of development is on the brink of becoming a serious market, yet eBay and Mr. Omidyar would rather trade that serious investment and market discipline for buzzing online interaction.                    

ebay Enters Microfinance

Five Part Series by MicroCapital

April, 2007