Kiva: The Ebay for Microfinance

Yesterday I went to the talk by Premal Shah about www.kiva.org which he calls the “Ebay for microfinance.” It was at Zerox PARC. Thanks to Chari for giving me a heads up about this. They get lots of press and also see a recent NY Times article about them.

 

Kiva is a nonprofit website and clearing house that enables Internet users (lenders) to give 0% (interest-free) loans to specific individual or small-group “entrepreneurs” (borrowers) in developing countries in Africa, South America, Eastern Europe, and Asia. They work with 85 field partners from 40 countries, called microfinance institutions (MFI), who post/vet entrepreneur profiles which are in turn selected by Internet users for personal loans. One of the biggest advantages of Kiva is end-to-end transparency — each lender can “see” who which borrower they are lending to, track their progress through journal updates, and see when the loan is being repayed. See a blog post by Guy Kawasaki that explains their fee per transaction business model — $2.50 voluntary fee that lenders pay when checking out their “shopping cart.”  

Yunis was first 30 years ago, and today there are 10,000 MFIs worldwide. He estimates there are 500M people needing loans like this, and only 100M have been reached through traditional microfinance to-date. Access to capital is still a bottleneck he says. Note: Kiva is prevented from operating in India due to their bank regulations.

Kiva Statistics. Kiva is 3 years old, so far $20M loaned by Q1 08 in 3 years since inception,. Observing parabolic quarter on quarter growth in loans and expect to have loaned $250M to $1B in five years surpassing efforts of microfinance initiatives major banks like Citibank ($100M).  

The Kiva model:  

Internet user (a lender, social investor) 

–> Kiva (online marketplace)  

–> Local Field Partner (Microfinance Institution)  

–> Developing World Entrepreneur (the borrower) 

Each Kiva lender has given on average 2.2 loans — $25 max limited by Kiva. Over the 20-30,000 people visit the site daily, and 3% end up giving loans. Each borrower is usually funded by 15-20 lenders on average — typically in the range of $1000 total loan size. The lenders usually sign up within a day of a loan request being posted for an entrepreneur. In some war torn or crisis areas like Iraq of Afghanistan, the lenders sign up in just a few hours. 

The lenders (social investor) rationale is that Kiva is transparent (know where it goes), sustainable (if repaid, money can be lent to someone else), affordable ($25 to change someone’s life), and unique (“I love microfinance, I want to participate”). For the microfinance institution, Kiva offers a low interest US dollar capital, no liability, flexible repayment terms, and financial assistance + incentives for transparency. 100% of loan funds go directly to the borrowers.

Kiva checks out (verify) the MFIs and the MFIs in turn check out the borrowers. The MFI charges 20% interest rate to cover distribution costs, and they bear currency ris as well when converting from US dollars to local currency and back during repayment period. In the future Premal hopes they can establish credit histories for individuals and bypass this intermediate layer completely. Kiva uses random sampling to audit and check on the MFIs for fraud.  

Unlike traditional microfinance where borrowers are organized into groups who are accountable to each other, social accountability is created via the Internet. Borrowers’ profiles are made visible on the Internet, and is therefore visible online to locals who watch each other at Internet kiosks/cafes. 

Capital. Internet users are willing to bear greater risk than banks probably due to the “personal connection.” People don’t want (need) to lend with interest, whereas banks have to when they are working with MFIs.  

Operating Principles. “Unreliable credit is OK, but unreliable data is not OK.” Each lender gets a “portfolio” of people who they lend to, much like a stock portfolio on Etrade. Loans in this model create a “persistent tie” between the people across the world with journal updates. The accountability is simple. If you are getting repaid, something is working. If you don’t get repayed, something is not working. MFIs report repayment rates of 99.7% but Premal believes that’s skewed to report better than actual results because the MFIs don’t want to discourage Kiva. He believes the actual repayment rate is over 90%. There is a “Risk & Due Diligence Center” on the website. 

Diversification. I asked what types of different activities and market opportunities are being funded, epecially outside agriculture. He said he doesn’t know for sure, but says that agricultural opportunities are the dominant activity being funded. In addition, there appears to be a slight lender bias. For example, the most popular kind of loan that gets funded by lenders is African female farmer, and the least popular is an Eastern European male taxi driver. He questions whether or not that is economically rational, but says that’s what it is right now. In 3Q 2008 they plan to open up APIs so researchers can download and analyze the loan data from their website to gain further insights. 

Organization. Kiva.org is 25 people and operates on very low overhead thanks to cooperation and donations from several silicon valley companies. For example PayPal gives free payment processing. Google offers free AdWords traffic.  

Advertisements

2 Responses to “Kiva: The Ebay for Microfinance”

  1. Morgan Stanley Microfinance Conference « Sri Spot Says:

    […] Sri Spot Fun Stories and Contrarian Viewpoints for Everyone « Kiva: The Ebay for Microfinance […]

  2. Mohanakrishnan Says:

    I have I9 Self Help Groups, each consisting of 15 members . I would like to see all of them develop economically.
    I shall be thankful if the KIVA organistion could help me in this. I am willing to learn and adhere to the rules of your org.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: