Wednesday, September 24, 2008

Invest in Africa

Harvard economist Dani Rodrik discusses a new development tool that targets small and mid-sized businesses in Africa:
"Our Center for International Development launched its new Empowerment Lab with a conference yesterday, and one of the most interesting new social entrepreneurship initiatives I learned about is something called This is a web-based platform that allows you to look up a list of African entrepreneurs who need funding for their projects (described briefly on the site) and to offer them loans. You bid a certain interest rate, which is accepted as long as it is below the maximum the entrepreneur is willing to accept and as long as others have not bid below you. You can lend as little as 5 euros. The average interest rate accepted is 12.8 percent per year, and I am told that the rate of default has been so far in the low single digits."
Check it out. The company describes themselves as a:
"hybrid between Grameen Bank, Wikipedia, MySpace and eBay, MYC4 offers an opportunity to invest money and knowledge in Africa’s future by providing a forum for exchange of advice and knowledge with the purpose of growing and supporting entrepreneurism in Africa."
It's an interesting concept, particularly targeting small and mid-sized businesses rather than micro-businesses. In this sense, they are trying to overcome the lack of financial depth in most of Africa. Large businesses can get loans from international banks. Micro-borrowers can get loans from NGOs and other micro-credit providers. But small and mid-sized entrepreneurs don't have a real banking system to provide capital for investment.

Many people will balk at the existence of any interest rate for what is ostensibly a development project. However, the interest rate ensures that there will be a consistent supply of money and that the money will go to projects with the best chance of success. Also, people tend to forget that micro-credit also uses interest rates, often in the 30-40% range to compensate for the risk of default.

Plus, with a repayment rate of over 90%, it's a safer place to put your money than mortgage-backed securities.

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