What is Kiva?

Kiva is an organization that strives to connect people through lending for the sake of alleviating poverty.  It is the first person-to-person microfinance website, empowering individuals to loan as little as $25 with zero interest directly to individual entrepreneurs in the developing world.  

 

Perhaps an anecdote is the best way of explaining what Kiva does.  There is a taxi driver in Azerbaijan named Eynulla.  An internally displaced person (IDP), what he wants most is for his children to have a better life for themselves.  To achieve this dream, he has been driving a rented car as a taxi business.  You can imagine that every month, his take-home pay is severely cut by the amount he pays in rent for the car.  If he had $1000, however, he could buy the car outright and not have to give a significant portion of his paycheck to someone else.  With such small profit margins, however, he cannot afford to save up that amount of money… imagine if (and this is unlikely) after meeting his and his family’s basic needs, he can save $5 a day. At that rate, it would take him 200 days to be able to pay for the car.  Traditionally, banks would not give him a loan because it takes a long time to get to his village, he doesn’t have collateral, etc.  This is what microfinance does:  It is the provision of financial services such as loans to people like Eynulla who desperately need them but have been ignored by for-profit banks.  

Kiva is an innovation made possible by the power of the internet and an inter-connected world.  So on one hand, there is a vast demand from people like Eynulla for these types of microloans.  On the other hand, there is an equally vast supply of people like you and I who have a few extra dollars that we don’t mind doing without for a few months.  Kiva facilitates this connection by creating an online marketplace of microlenders and microborrowers.  They post stories like Eynulla’s along with how much he is asking for and how long it will take him to pay it back.  Then people from anywhere in the world can loan as little as $25 to his business.  When I, a former chauffeur in DC, saw his story I empathized with his situation (I can’t imagine how frustrating it would have been if my employer had made me pay rent to use his car to chauffeur his daughters around) and wanted to loan him money at zero interest.  With 330,000 lenders on the site (and growing at a rate of ~2,600 a week), it is not surprising that a $1000 loan is met in a few minutes or less.  So that’s Kiva in a nutshell: facilitating connections between people through lending for the sake of alleviating poverty. And unlike child sponsorship programs of yesteryear, my $25 goes entirely to the very same individual I read and saw on Kiva.org .  In fact, this anecdote is really how I started loaning on Kiva: his business profile can be found here.  Kiva has no overhead costs but instead depends on people giving an additional 10% donation on top of their loan, grants from a few foundations like the Gates Foundation, and a few other revenue streams.

Kiva certainly has a big impact on the individual level:  Eynulla now owns his own taxi and can keep all his profits so his children can get an education… and I have the satisfaction of knowing that the $25 I wouldn’t have touched just sitting in my checking account has had a huge impact on Eynulla’s life (and I got it back – so I can relend to someone else or withdraw it back into my checking account!).  Beyond the individual level, however, Kiva stands to radically transform the entire FIELD of microfinance by effecting change at the institutional level  (see note at bottom of this page).

More Information

Here is a paper I wrote about Kiva in the summer of 2007.  Note that since then some of the challenges I noted have been faced and overcome, and the organization has continued it’s rapid growth from 12,000 borrowers to over 63,000 borrowers and from $7 million in loans to over $45 million today.  The organization is humming along, dispensing over $100,000 in loans a day at a rate of one every 20 seconds.  If you take the time to read the paper and want to discuss it, post a comment and I can reply with an insider’s perspective on my outsider’s piece:  Kiva Paper from July 2007  

For a true insider’s perspective, see Matt Flannery’s (Kiva co-founder) article on Kiva, conveniently located here: The Idea of Kiva

A Note on Institutional Impact

 

Kiva does not employ a vast staff that can analyze loan requests and distribute loans in the forty-two countries it works in. Instead, they partner with expert microfinance institutions (MFIs) in various countries who already have the staff and experience to distribute and collect loans. These MFIs have a strong social mission of serving the poor.  They often are outgrowths of religious organizations (a pastor uses the church’s coffers to loan money to his parishioners)  a nonprofit helping women expands their services beyond education and health to include supporting home businesses, etc.) or a community organization dedicated to self-help.  These institutions are often handicapped when it comes to their own finances.  To get the money that they loan out to clients, these MFIs must rely on private capital from established banks etc. or on the savings of their selfsame clients.  Because microfinance is a relatively new field and also because these organizations are nonprofits, governments impose heavy burdens of regulation and supervision on them if they accept deposits from the public (often they must transform from nonprofits to banks and these have minimum capital requirements usually in the millions…it’s a similar Catch-22 that Eynulla faces…how do you save enough to get that minimum base if the best way to do so is to accept deposits which you cannot do until you reach that minimum base?  how does Eynulla escape his cycle of poverty if to escape it he needs an amount of money he can never get on his own to buy the taxi?) .  Thus, these MFIs borrow money from banks for the funds they loan.  Banks, though, charge interest of 12-18%+ on the money they loan to MFIs.  So if my MFI gets $1,000,000 it must pay $180,000 in interest to the banks.

This is where Kiva comes in at the institutional level.  By tapping into the vast supply of capital that quickly accumulates when thousands of lenders give microloans of $25 or more with no interest (Kiva will surpass $50 million in loans sometime early next month and hopes to reach $1 billion in 5 years), Kiva is almost a banker to the bankers of the poor.  MFIs that previously relied on borrowed capital with 18% interest rates can now ‘borrow’ capital at 0% interest, which drastically reduces their operating costs.  Imagine an MFI that partners with Kiva to put their lender’s profiles on the site, if they facilitate $1,000,000 in loans with Kiva’s microlenders, that’s an immediate savings of $180,000!  To see how significant that is, let me use some basic supply-and-demand charts from my dusty high school economics books.

If money is a market (which it is because market is a made-up word and when you make things up, anything goes!), then we can think of it as one where there are people who have money and people who don’t (isn’t that the essence of capitalism?).  Those with money will give those who need money at a price (interest).  Banks charge interest firstly to cover their own costs (salary for the loan officer, computers, etc.) and sometimes a little extra for profit for shareholders and investors. Note that nonprofits do not add that extra bit in.  On the other side, people who need money will accept it depending on how great their need is (i.e. if you really need money to start a business because without that, you’d starve, you’ll pay more than someone who is thinking about starting one on the side as a hobby).  So the actual interest rate is determined when the two sides reach an agreement acceptable to both.  Traditionally banks did not lend because the costs are enormous (imagine giving a loan to a person who lives in the jungles of Brazil and is a two-day boat ride away from your bank’s closest branch) but what they underestimated was how great the need of the borrowers were (there a lots of people who are on the brink of starvation/homelessness/etc.).  Most poor areas have predatory moneylenders who do recognize the need but exploit it to their own advantage by charging usurious interest rates of 200%+ and even 1000+%.  So MFIs lend the money without that gross for-profit exploitation mentality but charge interest rates high enough to cover the great costs of simply administering the loan.

Kiva helps MFIs and their borrowers in an indirect way by transforming this marketplace of money in favor of the poor.  In a simple supply-and-demand chart, supply (rate to cover MFI’s costs) can be lowered by lowering the costs of the MFI.  Kiva does this by supplying capital at 0% instead of private bank rates of 12-18%.  In this manner, MFIs can build up their own capital base (called equity) that will one day allow them to cross that normally prohibitively high threshold level required by governments and begin to accept savings. Or they could forgo that long-term approach to growth (called sustainability) and instead pass the savings directly to their clients by lowering their interest rates immediately because of their lower costs.  Finally, they could use the savings they get by using Kiva as opposed to banks to hire additional staff so they can reach more people who need access to loans (called outreach).  There is a healthy debate among practitioners as to which approach is best for everyone (sustainabililty vs. outreach).  In any case, Kiva helps push the market rate down by opening up the floodgates of zero-interest capital from hundreds of thousands of microlenders to the world of microfinance.

An Even Further Aside (using supply-and-demand graphs from high school!)

Interest Rate is set where Supply meets Demand

 

 

 

 

 

 

 

In this poorly drawn diagram, the picture on the left represents the market for loans for the poor BEFORE Kiva while the picture on the right shows the market for loans AFTER Kiva.  Kiva introduces a vast supply of previously untapped capital (your $25 plus your 300,000+ closest friends) at zero interest which allows supply to increase.  The current debate is whether the MFIs represented by the supply line ought to move to the red dot on the left or the red dot on the right.  The former reflects a decision by an MFI to pass the savings directly to the microborrowers (demand) though it has been shown they are willing to pay a higher interest rate.  In effect and in economic terms, this decision allows clients to achieve a greater consumer surplus (the area between the vertical axis, supply line, and demand line [usually a triangle because economics assumes everyone is self-interested and wouldn’t dare consider lowering one’s own surplus in favor of the other party) which if you want to get really technical also represents utility in a different graph (utility is the measure of happiness for economists).  In other words, it makes current clients immediately happier.  Because this concept of selfless behavior is utterly foreign to economists, this red dot is incomprehensible and not part of the debate I mentioned earlier (though in my opinion it should be mentioned).  The “sustainabilitists” argue that the interest rate should remain the same as the picture on the left and that the influx of capital ought to go directly into the banks coffers so at some point in the future, they can lower interest rates or reach more people.  The “outreach-ists” argue for the second red dot.  This dot represents the decision of the MFI to use this zero interest capital to expand their services to reach more people.  If they saved $180,000 by using Kiva, they’ll use those savings to hire more staff, get better technology, etc. so they can give loans to more people in more places.  An aside:  Basically, costs for an organization are split into fixed and variable costs.  Fixed costs are the same no matter how many you reach…ie a computer costs $1000 regardless of how many people you reach.  Variable costs are affected by the number of people you reach… ie the amount of gasoline your moped uses is directly related to how many villages you visit each day; more villages equals more gas.  Thus, if an organization can reach more people, they can split that fixed cost among more people and in that way lower the costs for each individual person (i.e. you buy a lawnmower for $500. if you use it 250 times, it’s like you paid $2 each time you used it whereas if you only used it 10 times, it’d ‘cost’ you $50 each time…and you’ll have to pay extra for gas each time regardless).  So, the second red dot shows that more people are reached (it’s further along the demand line) and that interest rates are lower (because the MFI can charge less per person the more people there are).  This approach means that while people don’t get as big of a jump in happiness as the first red dot scenario, MORE people get access to loans and your happiness does still increase if not as much as the first red dot (and remember, economists don’t believe in that first red dot).

 

And now I recommend you go buy yourself a drink.  You deserve it if you read that entire economic aside.  And remember, if you buy a single bottle, the glass is a fixed cost while the liquid is a variable cost…a bigger bottle yields a lower cost per ounce!  And if you didn’t remember that, maybe you should re-read the last section 😉 .

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