2011 Global Microcredit Summit Commissioned Workshop Paper November 14-17, 2011 – Valladolid, Spain Indirect P2P Platforms Written by: Timothy Hassett, VP Microfinance Kiva, USA JD Bergeron, Sr. Director of Social Performance Kiva, USA Michelle Kreger, Director Strategic Initiatives Kiva, USA Michael Looft, Regional Director Kiva, USA With Assistance from: Greg Allen Dean Dubbe Emily Govel Table of Content INTRODUCTION .............................................................................................................. 1 THE INDIRECT P2P MARKET ........................................................................................ 2 Socially-Motivated Investment or Social Capital ........................................................... 2 Global or Regional Focus ................................................................................................ 4 General Loan or Special Loan Products .......................................................................... 4 Risk Tolerant or Risk Averse .......................................................................................... 5 GLOBAL IMPACT OF INDIRECT P2P PLATFORMS .................................................. 6 Helps MFIs Scale and Attract Funding ........................................................................... 6 Spurs Innovation in New Products .................................................................................. 7 Crowd-funding democratizes social investment ............................................................. 7 Education Vehicle for Lenders on Base of Pyramid ....................................................... 8 Do some Indirect P2P Platforms create a market distortion?.......................................... 8 ADVANTAGES AND DISADVANTAGES OF WORKING WITH INDIRECT P2P PLATFORMS ..................................................................................................................... 9 Disadvantages of working with Indirect P2P Platforms ................................................. 9 Foreign Currency Risk............................................................................................... 10 Higher Operating Costs ............................................................................................. 10 Threats to Borrower Privacy...................................................................................... 10 Liquidity Fluctuations................................................................................................ 11 Advantages of working with Indirect P2P Platforms .................................................... 13 Low Cost Funding (for Social Capital Indirect P2P Platforms) ................................ 13 Public Relations ......................................................................................................... 14 Risk Transfer to Catalyze Innovation ........................................................................ 14 Borrower Empowerment ........................................................................................... 14 Assists Development of Best Practices ..................................................................... 14 CHALLENGES FACING INDIRECT P2P PLATFORMS ............................................. 15 Transparency ................................................................................................................. 15 Losses ............................................................................................................................ 16 Image of the Microfinance Industry .............................................................................. 18 FUTURE GROWTH AVENUES FOR INDIRECT P2P PLATFORMS ........................ 19 Technology .................................................................................................................... 19 Credit Bureau and Repayment Data .............................................................................. 20 Deeper Utilization of Social Networks on Indirect P2P Platforms ............................... 20 Small Business Lending ................................................................................................ 21 Beyond Microcredit....................................................................................................... 21 Micro-Insurance ......................................................................................................... 21 Individual Development Accounts ............................................................................ 21 CONCLUSION ................................................................................................................. 22 APPENDIX ....................................................................................................................... 23 Appendix A ................................................................................................................... 24 Appendix B ................................................................................................................... 26 Endnotes ............................................................................................................................ 28 INTRODUCTION The Information Age has changed the way people communicate, connect, shop and donate. In this new environment, Web 2.0 platforms have proven to be powerful tools for raising significant amounts of crowd-sourced social capital. Crowd-sourcing sites across the Internet have tapped into this power, raising significant sums for social needs in small amounts from a large number of users. Network for Good has raised some $500 million in on-line donations for non-profit organizations since 2001.I Online Microfinance Intermediaries (Online MIs) are Web 2.0 platforms that crowd- source funds for microfinance borrowers. Since 2005 three different types of Online MIsII have developed and proven their ability to source large amounts of capital. Two of these models are based on person-to-person (P2P) connections. Direct P2P Model – Direct P2P allows borrowers and lenders to connect directly, eliminating a bank or other financial intermediary, to provide for greater access to credit at a lower cost. Zopa in the United Kingdom was the first Direct P2P online marketplace and has raised over $217 million since opening in 2005III. It was followed by platforms such as ProsperIV and Lending ClubV in the United States during 2006 and 2007 that have raised $242 million and $305 million in loans respectively. This model has generally evolved in economically developed markets, but China also benefits from Direct P2P Platforms. Indirect P2P Model – The Indirect model typically provides capital to developing markets by connecting borrowers and lenders through local intermediaries or field partners1. Kiva was the first Indirect P2P online marketplace and as of July 2011 had raised almost $225 million in loans since 2005.VI MyC4 is one of many other Indirect P2P platforms. Since its founding in 2006, MyC4 has raised over $19 million in loans.VII Microplace Model – This model does not rely on P2P connections and is named after Microplace that was founded in 2007. Microplace crowd-raises investment funds for issuers such as Oikocredit and Calvert. Microplace investors choose local projects to finance, but take credit risk on the issuer.VIII All of these Online MIs democratize ways in which funds are raised for microfinance. Individuals can participate in the industry and lend low amounts of $25 or less. Direct and Indirect P2P platforms connect lenders with borrowers and help lenders understand the challenges and opportunities that people face around the world. 1 For purposes of this analysis, Indirect P2P participants may have their loans booked for accounting purposes with the local intermediary or not. Regardless of where loans are booked, Indirect P2P participants use local intermediaries to source borrowers. Borrowers source themselves on Direct P2P sites. 1 This paper reviews the evolution, prospects and challenges of the Indirect P2P model. Indirect P2P participants are identified and compared along criteria such as their target markets, risk tolerance and whether financial returns are offered. Advantages and disadvantages faced by an MFI working with an Online MI are highlighted as well as a discussion of the issues raised in CGAP’s 2009 Focus NoteIX about online funding. THE INDIRECT P2P MARKET No trade association or other group consolidates information on the Indirect P2P market. We have identified 24 Indirect P2P market participants (see Appendix I), including platforms such as: a) Lend for Peace who connects lenders with micro-entrepreneurs in the Palestinian TerritoriesX; b) Wokai whose lenders make a permanent investment in a loan fund after three loan cycles in ChinaXI ; and c) Zafen that is person-to-project and allows for loans or donations to projects in Haiti.XII Of the 24 Indirect P2P Platforms identified for this study, 19 are not-for-profit with 4 for- profit participants including: MyC4, MyElen, 51Give and Veecus. Milaap is a hybrid (non-profit/for-profit) entity. As of March 2011 approximately $233 million had been raised through Indirect P2P platforms with some 90% through Kiva. Table 1 Top Five Indirect P2P Platforms Information as of Q1/2011 Platforms Loans Funded Kiva $210,000,000 MyC4 $18,000,000 Babyloan $2,300,000 RangDe $1,000,000 MyELEN $900,000 Indirect P2P platforms can be differentiated based on whether: a) they provide social capital or socially-motivated