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InUrJita CheckinUrPrice
Posted - 2009.10.23 12:24:00 - [1]
 

Bond issuances with a short duration, low amounts of requested isk and interest offered, generally from an unknown personage, seem to be a perennial annoyance of the MD. As one member remarked, it seems a lot of work to establish the identity of potential borrowers through audits and research for such a small return.

In effect, there is a mismatch between the expected returns of large scale lenders and small scale borrowers. Such a mismatch often represents an opportunity for profit!

Grameen Bank, which pioneered the micro-credit lending model in real life, offers plenty of lessons for dealing with just such a mismatch. Novice entrepreneurs are given basic training in the maintenance and operation of a business, and aided in constructing a viable business plan. They are then assigned a group in their locality with which they meet on a regular basis for discussion, mutual education and sometimes assistance in meeting loan payments. If a payment cannot be made, an extension is negotiated without punitive action.

There are some obvious advantages to this business model. For one thing, as a middleman organization, it would not need to operate as a depository institution, eliminating many of the risks of a more formal bank. Another advantage is the training received by the borrowers -- only the most dedicated business person (or scammer) would bother to sit through it for capital. Additionally, the group meetings create a positive moral force, through peer pressure, for maintaining good credit and keeping up with payments -- as well as an early warning system in the event of a potential default. And the ability to restructure payment plans on the fly keeps the borrower from having to choose between admitting failure or absconding with the funds.

More broadly speaking, the micro-credit model is the reverse of the traditional depository institution. It derives its funding from a relatively small number of high value loans, and then spreads those loans amongst a large base of small value borrowers. These small value borrowers are then justifiably charged a higher level of interest due to their higher individual risk, even as the value at risk decreases. Also unlike a traditional depository institution, it has the advantage of a small number of long duration liabilities matched with a large number of short duration assets, thus ensuring that any shortfall can be anticipated in advance of a claim coming due.

However, there are a number of downsides to consider. Although the value at risk for any individual relatively unknown borrower is low, the total value at risk is undoubtedly larger than it would be for a single well known borrower -- a risk somewhat compensated by higher interest rates. There is also a danger that the sheer number of borrowers will fatigue the institution, resulting in its collapse due to absenteeism or scamming. These can be somewhat dealt with through regular leave and a large staff, but both increase the operating costs of the institution. Finally, outright scamming is a perennial risk, though hopefully minimized by the lack of large piles of isk on hand to take from.

While the micro-credit model presents some risks, it might also fill a gap in the current market between the expectations of wealthy lenders and the ability to pay of small time borrowers. It may even expand the number of players interested in joining the market in Eve as full time participants.

SencneS
Rebellion Against Big Irreversible Dinks
Posted - 2009.10.23 13:11:00 - [2]
 

Edited by: SencneS on 23/10/2009 13:14:36
I considered this but quickly came to the conclusion that Microloans carry a sizable amount more Risk then any other IPO/Bond/Loan/Bank. The thing that bothered me about Microloaning is size. While the investment would be very small the risk would be very high. The target customer are people needing less then say 500mil for whatever reason.

500mil is VERY easy to come by in multiple ways for anyone with a handful of average skills. So what type of person needs say 500mil.

A) Need to buy a PLEX or two. These people carry the MOST risk. 1) They are poor in EVE and probably don't have enough skills or play time to farm out a PLEX in level 4 Missions (Which can take maybe 3-4days tops even with limited play time. 2) They are Poor in real life which brings into question their continued playing time. If they can't play the they pay back the loan.

B) Need a little cash to do some Marketing. If they need a little cash they are trying to bite off more then they can chew, reluctantly I mention this but Ricdic started out with 5,000 ISK and built it up to almost 500mil in 30 days. Do you really want to give 500mil to someone to do a project when in the space of 30 days someone fresh newbie character turned 5K int 500mil. Granted Ricdic knew what he was doing but it's an example of half a bil a month for someone totally new. In other words, people who could actually use the market well enough to make payments on the loan can do it in a time frame without a loan and 5,000 ISK.

Those are two of the things that bothered me about Microloaning, it's almost as if the loan is too small you assume more risk because it's likely you're dealing with someone who has no experience in EVE. Not to mention every other "risk" concern like no collateral, unknown people etc. the same things that everyone brings into question over 10B, is no different then Microloaning. Just that Microloaning also has additional risk concerned. Good luck to you if you do this, you don't need much capital and I'm sure there are people who would honor the payback etc.

Edit:- For some reason I pressed post before I was finished Confused

Artheon
Gallente
Wandering Provocateurs
Communitas
Posted - 2009.10.23 13:53:00 - [3]
 

I think the situations that SencneS mentioned are definitely valid and problematic for microcredit loans. That being said, I think there are plenty of valid, and possibly profitable loans, that could be made in small amounts.

1. Small - mid-sized corporations that need venture capital to buy infrastructure necessary to reap larger profits. Whether it is isk to buy a POS to take advantage of research facilities, production capabilities, or wormhole exploration - each of those opportunities could easily lead to sufficient profit to overcome the initial capital expense. You would probably want to set-up a model where the Corporation invests 60% of their own isk and micro-credit covers the remaining 40%.

2. Isk to purchase ships. Whether this is isk to purchase a ship to do missions or to help off-set the cost of a Rorqual to improve refining efficiency - there is a role for micro-financing there.

3. Isk to start up on a very specific trade idea (as in, they can demonstrate the fundamentals of the idea to the loaner).

and so on.


Ultimately, you probably wouldn't waste someone who has 4 billion to invest in a 75 million loan to an individual. What you could do is offer investors the ability to invest in a category of loans. They would put in 1 billion for corporations looking for POS capital on the agreed upon framework (corp with xyz history and putting in v amount of their own capital). The middleman would seek out corporations that fit that bill (or merely look through the applications they have received) and invest in the most promising ones. From the investor's point of view - they have to do minimal amounts of work and receive automatic payments. Although there maybe larger amounts of risk for any given one of the loanees of defaulting - you do face much less risk of your entire investment being washed away which is the case in most loan schemes.

It is an interesting idea with obvious benefits to "small-time" players.

SetrakDark
DarkCorp Citizens Holdings
DarkCorp Citizens
Posted - 2009.10.23 14:34:00 - [4]
 

Originally by: Artheon
stuff


I definitely agree with your overall post. The first few big investments as a corp represent the biggest bottlenecks to growth, but they also represent the biggest potential for growth. The 1st lending institution that can make small short-term development loans to corporations a standard practice will make the returns from sov look like pocket change. The trick is to have a continuous scale of pre-packaged development loans so the corps have an incentive to pay off old loans to then access the next bigger one.

Artheon
Gallente
Wandering Provocateurs
Communitas
Posted - 2009.10.23 14:48:00 - [5]
 

Jita also mentioned something that I missed initially.

There is a positive feedback loop to the Grameen Bank model. The middleman (or even the loaner if they are sufficiently interested) provides training, best practices, and advice to the loanee. This, to some degree, helps the lending agency determine the capability and seriousness of the loanee. In addition, this helps to minimize risk as it would increase the chances of success for the corporation.

If someone was to do this - I would start on a referral basis. Select a few corporations that you / friends of yours know personally and pitch the idea of a micro-credit loan. If they appear competent / willing - ask for investment from a person seeking an investment opportunity.

After initial results, see what worked / didn't and then use the corporations that succeeded to expand your network of potential loanees by asking them for referrals.

You could post this on forums and seek applications but I would make the amount of blind applicants that you accept still be a minority of the portfolio.

Cainam
Hypherians
Posted - 2009.10.23 22:39:00 - [6]
 

Just your friendly lurker here; the micro-loans thingy has been done

Didn't work too well, I'll be happy to share my experience if anyone's interested, just mail/convo me Wink

Diametrix
Caldari
Wavefront Industries
Posted - 2009.10.24 01:40:00 - [7]
 

Regardless of whether it's been done and failed before this is the kind of novel approach to growing markets and building content we all want.

Granted, past failure should be considered. Especially the nature of the previous enterprise and any identifiable shortcomings.

Would the microloan agency proposed be both funded and operated by the interested backers?

And who would the initial targets of such microloans be? Newbie soloists starting missions, mining or trade? Or startup corporations needing lower level backing?

I like the idea...

InUrJita CheckinUrPrice
Posted - 2009.10.24 01:52:00 - [8]
 

Originally by: Cainam
Just your friendly lurker here; the micro-loans thingy has been done

Didn't work too well, I'll be happy to share my experience if anyone's interested, just mail/convo me Wink


I'm offering this more as an article for discussion than as a possible business plan. However, I would like to point out that your attempt lacked the key group work and training that any micro credit institution needs to reduce the risk of default. It isn't the absolute size of the loans that makes a lending institution a microcredit institution, it's how the borrowers are prepared for them.

Artheon
Gallente
Wandering Provocateurs
Communitas
Posted - 2009.10.24 02:27:00 - [9]
 

One possibility is to channel prospective debtors through Eve University. I joined their chat channel and they said they covered most things aside from corp management. This might provide a prohibitive delay for people seeking a loan but perhaps that's a good thing. Weed out the earnest from those who are less so. I also don't know what the quality is of those lessons but my guess is that it is probably pretty decent from the Eve Uni people I have run into. Obviously, Eve Uni might not want the added burden so would be best to check with them.

That takes away from some of the time intensive training that would tax a prospective middleman's time. Burning out is always an issue with ideas like this.


Cainam
Hypherians
Posted - 2009.10.24 22:11:00 - [10]
 

Originally by: InUrJita CheckinUrPrice
Originally by: Cainam
Just your friendly lurker here; the micro-loans thingy has been done

Didn't work too well, I'll be happy to share my experience if anyone's interested, just mail/convo me Wink


I'm offering this more as an article for discussion than as a possible business plan. However, I would like to point out that your attempt lacked the key group work and training that any micro credit institution needs to reduce the risk of default. It isn't the absolute size of the loans that makes a lending institution a microcredit institution, it's how the borrowers are prepared for them.



True, I didn't have a large group of ppl behind me in the trial-run. I'm sure it could be made to work if someone is willing to put in a lot of effort in to it and turn it in to an established organization.

Not sure what you mean by training though but certainly a larger organization would need clear routines and a process management system in place.

To be frank I pretty much came up with the idea and implemented it in a weekend, the only thing I really felt was ok was the screening process - the rest of it was pretty much a quickly put together excelsheet with a few scribbles on it Wink

Artheon
Gallente
Wandering Provocateurs
Communitas
Posted - 2009.10.25 00:55:00 - [11]
 

Hey Cainam. You mentioned that you ran into some trouble but the thread you linked didn't reveal too much. What were some of the problems you ran into?

Cainam
Hypherians
Posted - 2009.10.25 02:48:00 - [12]
 

Originally by: Artheon
Hey Cainam. You mentioned that you ran into some trouble but the thread you linked didn't reveal too much. What were some of the problems you ran into?


Well, first off, as I said in the post my tool for loan-tracking was essentially a quickly thrown together excel sheet - I lacked a good method for tracking loans, and due to this my model at the time lacked any kind of scalability.

Further, the model I initially chose would have been based around a compounded interest on a weekly basis, making longer loans exorbitantly expensive - this mostly to avoid long term loans (again due to a lack of framework to keep a decent tracking of clients) Unfortunately I had to change this a bit in to the experiment simply because it was a hard model to understand.

Also the screening-process was far away from foolproof given at the time I didn't have (don't think it was implemented at the time) API checks in there - this allowed for a few loan takers to simply run off with the isk, and eventhough I had a plan in place to prevent this it was never implemented.

However, the major hassle was to get the service known. To be frank I expected when I started it up that the 500mil would be lent out in a few days - a week tops, but marketing the venture was harder than expected. In retrospect I must say I'm happy about this, since tracking was a nightmare with the tools I then had with my disposal - tbh, think paper and pen - but in excel... I'm fekking horrible with coding.

Anyhoo, if you want more info or perhaps a bit of statistics I'd be happy to provide it, but perhaps not over the forums ;)

Also, would be happy to tag along as advisor/investor if anyone is thinking about starting up a similar venture pending I don't have to code the tools needed Cool

Artheon
Gallente
Wandering Provocateurs
Communitas
Posted - 2009.10.25 16:55:00 - [13]
 

Your point about the problem marketing something like this is a really good point.

Referrals - Slow, perhaps prohibitively so.

Forum Posts - Two problems. Although you will always have scammers / trouble makers trying to invade your group; you may have a disproportionate amount of those applications to real ones if you do forum posts in the beginning. You would have to have a very solid screening policy and a good group of people reviewing applications. Second, you may not be advertising to the types of players who need a service like this by posting in the forums.

NPC Corp Chat / Rookie Chat - Most serious players will just assume you are trying a new scam. The types of players who respond to a chat posting may be ones looking for a free ride / not represent solid opportunities.

I think the best way to do it is to do a combination of these but, as you would with a stock portfolio, limit the percentage of credit that goes to each group. For referrals, since they represent the safest type of investment, make them the majority of your holdings. NPC Corp Chat versus Forums - not sure which is safer but start them at equal shares until you get an idea, through experience, which is better.

Scout Ops
Red Federation
Posted - 2009.10.25 23:14:00 - [14]
 

Edited by: Scout Ops on 25/10/2009 23:15:40
Originally by: SencneS
stuff


1- false. You cant make 500M isk with "some days of missioning even with low time" ... lol????? maybe in your fantasy world. Even if it was true, I dont think a 2 month old character could do lvl4 missions decently.

2- false assumption. A new player can benefit a lot from a 500m loan, when I was a noob I found it really hard to build up money, but once I got my 200M things went much better!!!


please go outside these elitist forums and chat to real life new players inside the game. You will find that everybody thinks 100M is a HUGE sum of money.


 

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