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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9 thoughts on “Kiva starts doing what we thought they were doing all along

  1. Sounds neat, but I suspect it won’t last. If the program is subject to decent auditing and those results are made public, some combination of higher default rates and outright fraud will kill this unmediated channel. Two years from now, Kiva lenders be asking “what the hell where we thinking cutting out the local partners?”

  2. I’m dismayed to see them touting the “efficiency” that enables them to offer the borrowers loans at 0%. The local organizations that are “vouching” for the Kiva Zip borrowers are still incurring costs to find them and assist them in getting their stories up on the web. Plus, Kiva is taking on more of the work in processing payments, etc., which is subsidized by grants that Kiva receives. Once again, the local field partners get put in a bad light because they aren’t “efficient” and have to charge interest!

  3. I am really excited about the new possibilities. It will potentially make it possible to lend money to people in more remote areas and in parts of the world that do not have lending agencies. I agree that there might be a higher default rate (I think it’s under 1% for regular Kiva loans), but surely they’ll have safe guards. I bet if a tribal chief, community leader, pastor or Imam is vouching for people that don’t pay back, they’ll stop taking his/her recommendations.
    I don’t think it puts the local field partners in a bad light at all, it just expands the number of folks who might get loans.
    Good for Kiva for making the bold innovative attempt. I hope it’s a great success, and I will give a little extra in my donation after making a zip loan.

  4. In the cases where the reported default rate on KIVA at a particular partner MFI is so much lower than the overall default reported by that MFI on its general portfolio, which will prevail when the partner is omitted?

    Take Micredito in Nicaragua. According to Kiva it’s delinquency and default rates are 0%, i.e. it’s perfect. And yet on the MixMarket data, reported by Micredito, for the last year available (2010), it’s portfolio overdue more than 30 days was 9% and it wrote-off a whopping 11% of its portfolio, which are alarmingly high. There is presumably something magical about the Kiva loans in particular, that enables this sub-set of the MFIs lending to perform so much better than the rest. I have no idea what this is, but it would be an interesting trick to learn.

    - http://www.mixmarket.org/node/27819/report
    - http://www.kiva.org/partners/176

    If this magical touch vanishes, users may be better off going via the MFI. If it doesn’t vanish, it raises a question about quite what the MFI does wrong with the rest of its portfolio. Then again, perhaps this magical touch is a facade in the first place.

    I speculate: If MFIs are willing to absorb the occasional default on Kiva, i.e. they pay default shortfalls to the benefit of the Kiva user; this would explain why a loan via Kiva may appear to do so much better than the MFIs general portfolio. But why would an MFI do this, at their own expense? It seems irrational? If this ensures a continual flow of interest-free capital from the Kivans, the MFI may deem this a worthwhile expense to discreetly absorb just to keep the dollars flowing in interest-free, rather than having to actually pay to obtain capital like most banks. Kiva would be happy, as they can report the famous 99% repayment rates, and the Kivans would be none the wiser. In which case cutting out the middleman, the MFI, would likely raise the default rate to the Kivans dramatically, as they would have no one to discreetly absorb the occasional loss in their favour. This is merely a speculation though.

    But if I was an MFI, particularly one not doing too well and unlikely to obtain reasonably priced funding elsewhere I would be tempted to take interest-free money from Kiva, charge it out at over 42% to the poor (Micredito’s stated portfolio yield), and absorb the odd default in the process.

    Time will tell, but this sounds like a disaster waiting to happen. If all I need is a cellphone and some foreigner will send me money directly, I’ll sign up tomorrow. Obviously it is a little more complex, but really? One nice advantage of this is that the Kivan may actually finally have some idea of the actual interest rate the poor guy in Africa is paying, 0%, unlike now, when Kiva can trot out all matter of data about their loans except the interest rate. Why? Cut out the middleman and there is no danger of the current practice of a Kivan lending at 0% and the MFI lending this on at 80%. The 80% being the portfolio yield, of course, not the actual interest rate, which no one apparently knows, so they have to make do with the average. So the poor will likely do triply well – lower interest rates, fewer tedious forms to fill out at the MFI, and no real need to repay the loan to some random Kivan who has no hope of chasing down the borrower and no qualified representative on-site to do this job for him or her. Great move for the poor. Silly business model for everyone else.

    It’s a pity they didn’t do this in India, where it was the loan officers themselves who were largely found responsible for the forced prostitution of delinquent clients, child kidnappings, and the overwhelming pressure that led 54 people to simply kill themselves. Kiva Zip cuts out the loan officers of the MFIs. Rather than struggling the aggressive debt collecting loan officers of the MFI, they could just send an SMS to the Kivan in America somewhere and say “sorry, not going to repay, have a nice life, thanks”. If the village chief gets annoyed, so be it – it wasn’t his or her money lost, and he’s less likely than an MFI loan officer to encourage one of his own villagers to kill herself rather than repay the loan to some foreigner. Everyone’s a winner, except the Kivan, but they’ve seemed willing enough to pour money into Kiva this far, why stop now? They’re even happy to so!

  5. http://www.zidisha.org, started in October 2009 has been doing this all along. They are a truly online peer to peer microlending platform that caters to the still impoverished, yet increasingly computer literate populations in developing countries. After 2 years, over $100,000 in microloans, and 99.58% repayment rate, they are proving that this model works. Interest rates are set at mutally agreed upon terms between lender and borrower, where the groups of lenders and the borrower can also interact directly online.

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