Kiva - Case Study 4
March 5, 2009 – 7:31 am | by ChristianWho are they?
The team behind Kiva worked at TiVo, PayPal and Google before developing the service in late 2004. Kiva partners with many existing microfinance institutions (MFIs), which work on the ground in developing countries.
What do they do?
Kiva lets individuals connect with and loan money to unique small businesses in the developing world. Lenders choose a business to sponsor, then microfinance institutions (Kiva’s Field Partners) distribute the loan and provide expert training and support. 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.
How does it work?
Borrowers
Before an entrepreneur appears on Kiva, they are vetted by a Field Partner. 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, the loan is managed by the Field Partner. 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 microfinance institutions to charge interest enables them to bear transaction costs and currency risk, and achieve self-sustainability. Kiva is also the first organisation 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 period. 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 organisations that already have a lot of money. The smaller organisations 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.
Lenders can now form ‘teams’ in which members continue lending as individuals, but with each loan they make adding towards the overall impact of the team.
Typical transaction
Varies widely between $200 - $1200. The majority of loans are a smaller range of $800 - £1000. The average individual loan amount is $430.
Business model
Kiva is a non-profit social venture which currently has financial support from a number of angel investors, including Silicon Valley donors, and a number of corporate sponsors including Microsoft Research.
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. Profiles of the Field Partners themselves are also available on the website.
The one-to-one connections engendered between borrowers and lenders create greater transparency regarding money flows.
Performance
More than 400,000 lenders have provided over 80,000 loans through Kiva, at total value of just under $60 million. The current repayment rate is 97.5%.
Kiva currently has over 100 Field Partners around the world and has experienced an average month-to-month growth rate of over 30%.
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 microfinance institutions on the ground. However this is not necessarily a drawback. Part of the aim of Kiva is to help not only borrowers but the institutions as well, since it enables its Field Partners to raise debt capital directly from social investors.
