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Financial products that aid the poor and beat the market

Investors find a more profitable place to stash cash than banks. Bonus: It's also socially responsible.

By G. Jeffrey MacDonaldCorrespondent / January 12, 2010

Basanti Pradhan took a loan from Asmitha Microfin, a microlending organization, to launch a small dairy in her Indian village – and a second to start a costume-jewelry business.

MicroPlace

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For two years now, savers have had a tough slog. Rock-bottom interest rates have meant nominal returns for anyone holding extra cash. But those who believe their spare dough ought to do some good in the world have actually done better than their peers – a lot better in some cases. Low-risk, short-term commitments – supporting high-minded projects from affordable housing in the United States to microenterprise abroad – are generating enviable returns, sometimes as high as 6 percent.

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“In these low interest-rate environments, there is an opportunity for people to get average or better than average returns in some socially responsible investment choices,” said Doug Wheat, a financial planner at Family Wealth Management in Holyoke, Mass. “In high-rate environments, [a 3 percent return] seems low. But in low-rate environments, that seems pretty good.”

A combination of factors, including a new microfinance model and minimal competition from major banks, is enabling mission-focused institutions to offer superior deals and become cash magnets. In the process, they’re attracting the likes of Richard Frisbie, a Purdue University administrator with a penchant for strong rates of return and a low tolerance for risk.

Mr. Frisbie earns 3 percent on most of his 17 Calvert Foundation community investment notes, which he bought through MicroPlace, a business unit of eBay. Each month he commits new funds, usually for less than one year, thus ensuring a steady availability of cash. He likes the way his money supports artisans and other
microentrepreneurs in developing nations. And he doesn’t worry about them defaulting. Even though MicroPlace investments aren’t insured, the institutions that broker his debt stand behind their borrowers and have a 100 percent repayment history through MicroPlace.

“Lenders should be able to have a portfolio that’s self-sustainable, meaning that you don’t lose money,” Frisbie said. “If it’s financially sustainable for individual lenders, then those people will be more likely to invest more and the [micro-lending] model can grow.”

MicroPlace lets investors with as little as $20 support certain types of microentrepreneurs, such as small businesses in Texas or ecofriendly coffee growers in Costa Rica. Rates of return can run as high as 6 percent since partner organizations can sometimes lend the funds overseas at even higher rates. Dozens of MicroPlace investments pay 3 percent on commitments of two years or less. By contrast, people seeking a 3 percent return from an ordinary bank CD would in most cases need to tie up their funds for four or five years.

“We have empirical evidence that investors are interested in these investments because of the financial return,” wrote Ashwini Narayanan, general manager for MicroPlace, in an e-mail. Even so, she added, most MicroPlace investors also want to help the world’s poor.

In most years, a 3 percent return would seem paltry. But with interest rates at rock-bottom levels, gaining 3-6 percent on an investment represents a strong showing. And it can be done while financing a host of social goods. Interested in these products? Already investing? Let us know on Twitter.

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