kiva and zidisha -- microfinance loans as a way to manufacture spend

edit feb 23/14: please see my update on zidisha.org here.

manufactured spending is the process of spending money on a credit card for the points or threshold bonuses while knowing that most, if not all of that expense, will be reimbursed at no cost for the user. this is extensively discussed online, and there is an entire flyertalk forum devoted to this.

manufactured spending is not just the basics, like buying things for work and having those expenses reimbursed by the company. manufactured spending goes beyond that. some things in the past that i've heard about include:

• buying vanilla reloadable credit cards at the pharmacy (with 5x mile multipliers with various cards), transferring it to an intermediary pre-paid card, and then cashing them out at ATMs for minimal cost
• buying thousands of dollars worth of 1$ presidential coins with free shipping on credit card, then cashing them out at a banks
• buying and selling to yourself (or trusted friend) using amazon payments (provided you have an american SSN)

these have netted substantial amounts of miles for its users south of the border. most of these techniques don't work for canadians as there generally are 2.5% surcharges on credit card purchases. this alone generally negate any of the rewards associated with these schemes. admittedly, i don't know the intricate details -- if it does not work for me in canada, i'm not one to research it too deeply. however, one mini-version of manufactured spending is through the world of microfinancing.

kiva.org -- microfinance 101

despite the currency conversion fees, something that may be worthwhile to some would be microfinancing or microlending. this is the act of providing loans to small businesses or entrepreneurs who lack traditional banking access to loans. a good example of this would be making loans to small businesses owners in developing countries, where for the ordinary citizen, the cost of the loan and the associated interest rates are quite prohibitive.

kiva.org is an organization which has local field partners who find small business owners in developing countries. kiva then posts their requests on their website, and kiva users (lenders) can lend small amounts (usually 25$) to these small business owners (borrowers). once a borrowers have enough lenders, the loan is supposedly disbursed. in my own experience though, the funds are disbursed beforehand, and kiva is just trying to find enough lenders to make up for the loan after the fact. borrowers then pay back through a pre-determined payment schedule. kiva users don't earn interest. there is a real risk of loan default (at the time of writing, there is a 98.99% repayment rate). there is also a chance of currency conversion losses. for the most part though, i have not run into any troubles.

my statistics compared to the average

in order to fund these loans, you can pay using your credit card via paypal. paypal's currency conversion fees/rates are not the best, so i would consider using your no forex fee card to pay the USD price. as the borrowers pay you back, you receive credit into your kiva account. you can either re-loan the money, or you can request that the money is cashed out into your paypal account. you can then convert this back to canadian currency. when your account balance reaches $150+, you can transfer this money back to your bank account for free (amounts less than $150 incur a $0.50 fee). paypal reportedly has waived its fees for kiva.

my strategy has been to go on a loan-buying spree when CAD is roughly $1.01 or $1.02 per USD. when the canadian dollar falls to $0.96 or $0.97 per USD, i cash out my loans and transfer back to my bank account. it's not a huge amount of money that we're talking about here, but i figure i might as well try to earn a bit of a reward while doing my part in helping these business owners out. i personally do $100 or so at a time, but i hear reports from people on flyertalk buying thousands of dollars at a time.

zidisha -- microfinance 201

zidisha.org is a less tested microfinance site. it certainly doesn't have the press that kiva has, however it's something that i've tried out as well. it works on the same principle as kiva.org, however the main difference is that lenders on the site can ask for interest. a prospective borrower will tell you how much they require and what interest rate they are willing to accept. lenders will then offer various amounts to loan (e.g., $25 of a $800 loan) and will offer various interest rates that they are willing to accept. at the end of the bidding process, all of the offers with the lowest interest rates are accepted in order to build the required loan amount, and the loan is dispersed. there is a 2-month grace period before repayments start.

loans can be funded with credit card via paypal, however there is a 3.5% fee associated with this. this fee was temporarily waived suspended in march on a trial basis. therefore, my rule is that i will always insist on an interest rate of at least 3.5% to cover this cost. repayments are made and are collected in the user's zidisha account. this money can be re-loaned again or withdrawn for free to paypal.

my statistics on zidisha -- i just started this in march

conclusion
both sites offer ways to purchase loans via credit card while helping small business owners in developing countries. as per wikipedia, these sites themselves aren't without their fair share of controversy. however, the potential good is enough to outweigh those criticisms. it's an almost free service while earning a few miles along the way.

have you tried kiva or zidisha? has it worked for you?