If you look at the current online opportunities available for either Micro or P2P lending, you see this positioned either are Charity (or do good thing) or as an investment. For example, if you see MicroPlace or RangDe, they position themselves to attract your good/giving side, rather than your risk and growth conscious investment side. If you see LendingClub or Prosper, then they kind of offer a high return investment option, which also allows you to help other people in need.
So the obvious question is whether you look at this Asset Class as part of your Charity piece or as a valid investment option?
This is a very difficult question to answer.
Though both of these investment options are highly risky, P2P lending is usually riskier as the Micro Lending companies at least have better credit checks and local companies backing at least part of the funds. Actually RangDe seems to offer some kind of protection is that the SHG groups that are part of its lending network actually kind of insures you against loss of your investment (Social Collateral).
Even given this, this is a high risk investment. So the reason you are even looking at this as an investor, is because it has high returns.
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In P2P, this is usually in terms of higher interest rates, up to 16-20% (the general interest rates in the US being around 1.5%-3% for saving accounts and CDs gives you a perspective on how good this return is).
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On the Micro Lending side, the return is not in terms of money, but more in terms of feeling good, impact on society, satisfying your charitable instincts etc.
But overall I think even micro lending can be viable and actually grow only if it also satisfies part of your investing brain. This is basically because, the amount of money people will put up for charity is extraordinarily small compared to what they would put into an investment. So for Micro Finance to actually grow, it needs to start also tapping into the investment instincts. Microplace is starting to do that. They now have investments that earn interests around 5-6% (which is quite good in the US context, compared to the much safe CDs , which is market what Microplace is serving). So if people think they are getting adequate returns and it is also good for the society, this can really open the taps for Micro finance as a whole.
Personally, I divide the amount I keep aside for investments in M & P2P lending roughly at 30-70, towards charity vs. investments. So 70% of the funds go into either the 5+% return notes in Microplace or P2P lending (with 8+% returns), while 30% towards MicroPlace investments that I believe in (notes servicing groups in India or Green initiatives) and other charity lending like RangDe.
If you are serious about this asset type, I would recommend that you to do something like this so that you both do your bit for society at the same time you make sure your wealth is growing adequately.
Happy Investing
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