Kiva

Kiva, first P2P microfinance system

URL = http://www.kiva.org

Description

http://www.worldchanging.com/archives/003664.html

"A new microfinance group, Kiva, intends to take a different course: they've built the world's first peer-to-peer, distributed microloan website."

Kiva's first country of focus is Uganda, where the Internet is available even in poor rural areas. Lenders may loan money through kiva.org, which lists businesses in need of funding and provides background on the entrepreneur starting the enterprise. Individuals may makes loans in increments as small as $25, and can expect to receive repayment, without interest, at the end of the loan term, which typically runs between six and 12 months. Since Kiva's source of capital is charitably-minded individuals, it is able to provide more flexible loan terms than traditional financial institutions. To date Kiva has funded 13 small enterprises in Uganda, including a livestock business, a medicine shop, several produce businesses, a fish monger and a clothing reseller. Two of the entrepreneurs have already repaid their loans in full. The enterprises Kiva is working with are asking for loans averaging $500, and the average lender is loaning between $25 and $100. Kiva was founded by Matthew and Jessica Flannery, a California couple who have lived in central Africa; Jessica Flannery worked for the Village Enterprise Fund, a non-profit which has granted seed money to Kiva. They argue that a one-to-one process is inherently more transparent than contributing to a charity or NGO, which then redistributes the donations; just as important, making a direct microloan gives the lender a greater sense of engagement than would an indirect donation. Individual lenders can select precisely which business receives the loan, and will in turn receive regular updates on the start-up's progress:

Throughout the duration of loan repayment, as a lender, you will be sent regular (usually every month) email updates about the progress of your sponsored business' progress. Updates include things like: information on loan repayment progress; photos of the entrepreneur and perhaps the new capital equipment they've been able to purchase because of the loan; narratives on business growth; anecdotes about the entrepreneur's family improving their standard of living; news about local seasons or current events that might affect your sponsored business; and more. Content comes from our staff as well as from the recipients themselves (via our staff ).

Remember, these are loans, not charitable donations. 100% of the loan amount goes to the selected business; so far, no businesses have defaulted on their credit. Because these are loans, the "same" money can have a socially beneficial effect over and over again. A $50 loan, once repaid, can be immediately loaned out again, helping another start-up. Over time, multiple new businesses can receive microcredit support from a single initial loan. "

The introduction by Worldchanging commentators show the peer to peer ethos at work, in their rejection of NGO-mediated microloans:

"But the notion of do-good institutions doling out money to recipients has something of a 20th century character. While there are open-source models for microfinance, they generally seem to be intended to assist the creation of more microcredit NGOs."

Detailed Profile

From May 2007 in Open Business at http://www.openbusiness.cc/2007/05/20/the-emergent-field-of-p2p-finance/

"Kiva lets individuals connect with and loan money to unique small businesses in the developing world. By choosing a business on Kiva.org, lenders can “sponsor a business and help the world’s working poor make great strides towards economic independence.” Throughout the course of the loan (usually 6-12 months), lenders receive email journal updates from the business they’ve sponsored. As loans are repaid, they get their loan money back.

Who: The team behind Kiva worked at TiVo, PayPay and Google before developing the service in late 2004. Kiva partners with many existing microfinance institutions (MFIs), who work on the ground in developing countries.

Borrowers: Before an entrepreneur appears on Kiva they have first been vetted by a Field Partner for loan application approval. Each of Kiva’s Field Partners use their own application procedure which Kiva has reviewed and approved. This ensures that loan funds are actually going to genuine entrepreneurs who will use the loan for the purpose they specified. Kiva does not send loan funds directly to the entrepreneurs; instead, each loan is managed by a microfinance institution. The full value of the loan goes to the entrepreneur, but the Field Partners do charge interest. However, Kiva requires Field Partners to fully disclose their interest rates, and doesn’t partner with organisations that charge exorbitant rates. Kiva claims that allowing MFIs to charge interest enables them to bear transaction costs and currency risk, and achieve self-sustainability.Kiva is also the first organization PayPal is supporting by providing free payment processing, reducing the transaction costs significantly.

Lenders: Kiva’s loans do not provide a financial return on investment, but lenders do get the investment back at the end of the loan term of investment — which range from 6-12 months. There are no tax implications because there is no possibility of earning interest. For lenders, it’s a sustainable, high impact, high engagement way to get involved with just a little amount of money, and carries minimal financial risk.

Unless you’re extremely rich, an accredited investor, or a big institution, you can’t really invest in microfinance institutions, so lenders and charitable donors are limited to giving to organizations that already have a lot of money. The smaller organizations that are working hard to serve their communities and to loan money to people are typically capital-poor. Kiva allows individuals to access a long tail of organisations and individuals, which can potentially be more rewarding and efficient for lenders.

Community: Sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individual nature of Kiva’s loans and the feedback that lenders receive all the way through the course of their loan makes for more personal and social transactions.

Typical transaction: Varies widely between $200 - $1200. The majority of loans are a smaller range of $800 - £1000.

Business model: Kiva is a non-profit social venture, that currently has financial support from a number of angel investors, including Silicon Valley donors, and corporate sponsors including Microsoft Research. However, Kiva says “self-sustainability is critical and we intend to be fully self-sustainable by 2008. This will be achieved through the implementation of a number of income streams which may include optional transaction charges to lenders and low debt capital fees to Field Partners.”

Kiva’s loans are personal agreements between lender and borrower. There is no note or security involved.

Establishing trust: Kiva partners with existing microfinance institutions. In this way, they gain access to outstanding entrepreneurs from impoverished communities world-wide. The partners are experts in choosing qualified borrowers, and usually have many more promising projects than funds. Through Kiva, the partners upload their borrower profiles directly to the site so that users can lend to them.

Users receive emails throughout the loan term updating them on the progress of the business, and letting them know each time a repayment is made. Each project also has a business page on the website, with a journal which can be commented upon.

Loans are not guaranteed, but are statistically low-risk. Microfinance loans worldwide are generating repayment rates of 97%. To date, Kiva’s repayment rate is 100%.

Performance: Kiva has processed over $6 million in loans, distributed to more than 60,000 people. It is growing fast — in April alone over $1 million was loaned. The current repayment rate is 100% (although of course many loans have not come to term yet).

Problems or limitations: Kiva doesn’t fully cut out the middleman — it does bring investors and recipients closer together but there is another layer of interest-collecting MFIs on the ground. However this is not necessarily a drawback. Part of the aim of Kiva is to help not only borrowers but MFIs as well." (http://www.openbusiness.cc/2007/05/20/the-emergent-field-of-p2p-finance/)

Discussion

Warning: Kiva does not really practice peer to peer donations

NYT:

"Kiva, a nonprofit organization, promoted itself as a link between small individual lenders and small individual borrowers like Maryjane Cruz in the Philippines, who recently sought a $625 loan to support her family’s farm.

But Mr. Roodman’s blog post said that lenders like Mr. Kristof were not making direct loans. Borrowers like Ms. Cruz already have loans from microfinance institutions by the time their pictures are posted on Kiva’s Web site.

Thus, the direct person-to-person connection Kiva offered was in fact an illusion. Kiva’s lenders were actually backstopping microfinance institutions, and since Kiva and other online giving and lending models pride themselves on their transparency, Mr. Roodman and others suggested it might better explain what its lenders’ money — about $100 million over four years — was really doing." (http://www.nytimes.com/2009/11/09/business/global/09kiva.html?)

Guy Kawasaki on lessons learned:

"Guy Kawasaki, in his blog has highlighted 6 points that we can learn from Kiva, one of the most successful, non-profit p2p funding organization.

Here’re his points;

1. Create meaningful partnerships. Most entrepreneurs create partnerships to impress investors, journalists, customers, and parents. Hence, most partnership as bull shiitake. The best test of a partnership is whether its existence requires that you change numbers in a spreadsheet. No changes = b.s. partnership. In the case of Kiva, it has sixty seven partnerships with micro-finance organizations. It is these organizations that provide the “leads” for lenders to fund.

Also, Kiva has partnerships with PayPal (free transactions), Google (free traffic) as well as with Yahoo!, Micorosft, MySpace, and YouTube. As you can imagine, these kinds of partnerships do make you reboot Excel.

2. Catalyze and support evangelism. Like Apple, Harley-Davidson, and Tivo, evangelism starts with a great product, and Kiva has one. When you have a great product, then evangelists will appear, and Kiva has 250 active volunteers—what I would label “evangelists.” Kiva has really institutionalized evangelism if you ask me.

3. Find a business model. You’d be surprised how many people wave their hands or avoid the topic of business model completely. Kiva’s model is a minimum $2.50 voluntary fee that lenders pay when checking out their “shopping cart.” If I understand this right: lenders receive no interest and pay a voluntary fee to Kiva in order to loan money. And you thought Google had a great business model—wow, as Wayne and Garth said, “We’re not worthy.”

4. “Bank” on unproven people. What would the ideal background be of the founder of Kiva? Investment banker from Goldman, Sachs? Vice president of the World Bank? Vice president of the Peace Corp? Vice president of the Rockefeller Foundation? Partner at McKinsey? How about temporary administrative assistant at the Stanford Business School? Because that’s how Jessica started her quest. The spark that lit the fire was a speech by Muhammed Yunus, founder of the Grameen Bank and Nobel Peace Prize winner.

5. Focus on free marketing. Kiva launched in 2005 with seven businesses in Uganda. The first “marketing” was sending out an email to the wedding invitation list of Jessica and Matt. All seven businesses were funded in a weekend. Then the Daily Kos picked up their story from a hacked together press release. Then PBS’s Frontline covered the organization and loan volume went from $3,000 to $30,000 over night. No road show. No Demo. No TechCrunch 40.

6. Ignore the naysayers. The Flannerys got a lot of advice that you can’t send money around the Internet without government approval; that Kiva couldn’t scale beyond a few African villages; that a non-profit couldn’t offer an investment product; and that it would violate SEC regulations as well as the Patriot Act. Besides this, Kiva was a no-brainer." (http://sirehdancengkeh.com/?p=303)

More Information

1. Open-source based software support for microfinance projects, at http://www.mifos.org/
2. Social Lending
3. Is Kiva Misleading the Public? (by Sean Stannard-Stockton, from Tactical Philanthropy Advisors) http://tacticalphilanthropy.com/2009/10/is-kiva-misleading-the-public