Kiva starts doing what we thought they were doing all along

Two years ago, there was a pseudo-controversy around Kiva’s business model. The organization had received great acclaim as an innovative person-to-person microlending platform. Lenders in rich countries could browse profiles of micro-entrepreneurs who lacked access to other capital sources, and send funds to help them expand their businesses. It was an elegant, simple solution. Perhaps too simple.

The kerfuffle started with a blog post from David Roodman at CGD. Kiva had always been clear that the funds were channeled through a local microlender, which distributed them to the borrowers. Roodman pointed out something that most of Kiva’s microlenders didn’t know: the borrower typically received funds from the local microlender well before their profile showed up on Kiva’s site, so your funds were not actually going to that particular borrower. Roodman’s post, and others, questioned the transparency of Kiva’s practices and ultimately led the organization to change how it communicates with its lenders.

Now, it looks like Kiva is launching a pilot program to do actual person-to-person microlending. They’re calling it Kiva Zip. Here’s how they describe it:

It all started in 2005 when Kiva began partnering with established microfinance institutions to enable individual lenders to make low-risk micro-loans to borrowers around the world. Now, Kiva Zip will enable lenders in the United States to make loans more directly to borrowers. Instead of working with a local partner on the ground to facilitate your loan, we’re sending your funds to the borrower electronically (e.g. using mobile and electronic payment methods). This increased efficiency allows for 0% loans to the borrower, but a greater risk for the lender.

(Emphasis in original.)

This is a markedly different business model from the current practice. Kiva is using mobile and other technology to offer very low cost loans to borrowers who don’t even have access to normal microfinance institutions. Pilot borrowers for the new system are in the United States and Kenya, because of M-PESA. In place of local microlending partners, Kiva Zip uses “trustees” who vouch for the borrowers but never handle any money.

I’m excited to see Kiva branch out in this way. Kudos to them for innovating. The crux will be lenders’ willingness to take on the extra risks of higher defaults and currency fluctuations. Kiva’s website notes that they plan to facilitate direct communication between borrowers and lenders, which could be a draw. Otherwise, it’s hard to see why someone would choose to lend through Kiva Zip rather than Kiva Classic. Whether it works or not, I hope they document the successes and failures. It’ll make a fascinating case study someday.

I’d love to hear from the readers on this one, especially those who are more familiar with Kiva’s work. Do you think Kiva Zip will be successful?

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