Personal touch, international reach

There was a party in San Francisco on 31 October 2009. The reason for the celebration was that the Internet platform Kiva had brokered $ 100 million worth of microloans for borrowers in 50 countries. Half of the total had been mobilised during the course of 2009 alone. Launched in 2005 with seven loans in Uganda, Kiva has become a global player – and websites that copy its approach are springing up like mushrooms.

The idea is simple: Kiva publishes low-income entrepreneurs’ loan requests on the web, and lenders choose projects they want to support with a contribution of at least $ 25. If contributors’ pledges amount to the required sum within 30 days, an MFI that cooperates with Kiva disburses the money to the borrower.

Kiva's partner MFIs manage the loans, support the micro entrepreneurs (for instance, with training, insurance and banking services) and forward repayments and progress reports to Kiva and Kiva’s lenders. Neither Kiva nor those who lend money through it receive interest payments.

Borrowers, however, do usually pay interest. This way, the MFIs cover their costs. Because of small ­credit volumes, short loan periods and intensive support, the administrative costs of microfinance (and, accordingly, interest rates) are generally fairly high. Kiva itself is financed by grants and donations.

There are several reasons for Kiva's success. First of all, the idea of microcredit is popular. Lending to small entrepreneurs is seen as a motivating way to help people to help themselves with a high probability of repayment. Kiva reports that around 98 % of borrowed funds are paid back. Accordingly, the risk for lenders is acceptable; as a general rule, they get their money back in full, and only forgo interest payments.

Kiva also benefits from the power of the Internet. Entry hurdles are low, money transactions via Paypal are simple and fast, and the website has an international reach. Support from celebrities like Bill Clinton, Oprah Winfrey and Dambisa Moyo has helped too.

One of Kiva’s most important fortes, however, is the social network it creates, connecting individuals all over the world. This platform enables users to communicate with one another, the partner MFIs and, through MFIs, individual borrowers. Kiva emphasises this personal touch and the impression of being connected with the borrowers by publishing individual loan requests complete with short biographies and photos or video clips. Progress reports are promised and often (although by no means always) delivered in good quality. Volunteer “Kiva Fellows” play an important role. They support the partner MFIs and post personal impressions and experiences on the web.

Kiva makes no secret of the fact that the lender-borrower link is often not quite as personal and immediate as may seem at first glance. For reasons of practicability, most partner MFIs use Kiva for refinancing purposes rather than for extending new loans. Generally speaking, not more than 30 % of partners’ loan capital comes from Kiva, so they are usually capable of pre-disbursing the loans from other funds.

Borrowers are under a legal obligation only to the MFIs but not to Kiva or Kiva lenders. Some MFIs guarantee repayments, however. In any case, the – at least indirect – link between the borrowers’ economic prospects and the money supplied by Kiva users is very real.

Essentially, Kiva’s work is about supporting, with interest free capital, MFIs which have been selected according to social criteria. Kiva generates funds from a new circle of sponsors who would otherwise probably neither be involved in development issues nor microfinance at all.

Kiva faces a number of challenges. The organisation is still young. It needs to find the right balance ­between transparency on the one hand, and simple user-friendly procedures on the other. It is crucially important to select and monitor partner MFIs diligently. Kiva must ensure they are not profit-driven but geared to social objectives. Kiva must also make sure that partner MFIs do not obtain funds under false pretences or even misappropriate them. In very few instances, such things have occurred in the past.

Growing competition

Kiva has inspired a number of websites. Some interesting examples are listed here:
– LendforPeace.org arranges small loans to entrepreneurs in the West Bank.
– Vittana specialises in loans for students.
– On a euro basis, Babyloan refinances microloans of partner MFIs that guarantee repayment. Lenders who use this website are exposed neither to risks of currency-exchange rates nor the risk of the micro ­entrepreneur defaulting.
– Novica arranges interest-free loans to artisans online, cutting out the financial middlemen.
– Wokai mobilises money for small loans in China, although the money is not repaid to the contributors. For three years, they determine what their money will be used for, and then it becomes capital at free disposal of Wokai's partner MFIs.
– United Prosperity mobilises people to provide collateral for loans issued by an Indian MFI. This MFI ­finances microloans with money from formal-sector banks. The microloans significantly exceed the collateral. Though United Prosperity, so far, is only working with a single MFI, its approach of coope­rating with local banks looks promising.

Finally, there are also two websites that offer lenders a positive return on investment: Denmark-based MYC4 and MicroPlace, an eBay subsidiary. However, MicroPlace caters only to investors in the USA and eschews the person-to-person (P2P) approach from the outset, offering only indirect investments in individual MFIs.

P2P, however, is perhaps the most fascinating aspect of the new internet options. The virtual ubiquity of the web even allows for unusual bilateral arrangements. In June 2009, Kiva first published loan requests from micro entrepreneurs in the USA – and some of the money (albeit a rather small share) came flowing in from places like Indonesia, the Philippines and even the DR Congo.