Microlending website Kiva’s original proposition was simple: Make an interest-free loan to someone who no bank will touch. The site, which launched in 2005, became wildly popular, as people gleefully gave a few dollars to struggling businesspeople in the developing world, and then saw that business grow and had their money repaid.
But many lenders assumed—not surprisingly, given Kiva’s marketing and web design—that the smiling face on the other end of the PayPal transaction got the exact cash they lent out. A minor kerfuffle ensued in 2009 when a blogger broadcast the fine print of Kiva’s website, revealing the nuance that a donation actually goes to take on the risk of a loan already made to that person by a microfinance institution. In other words, the person you chose to fund already had his loan. You just make it possible, retroactively.
Now Kiva is launching a program to do, essentially, what everyone thought they were in the first place. With Kiva Zip, it’s cutting out the middle man for real and offering direct lending Americans to poor entrepreneurs around the world. But it’s not to shut up the confused critics, it’s to reach the people even those microfinance partners won’t cut a check to.
"This is very much a pilot," Kiva president Premal Shah proudly admits of the new project that his microfinance organization launched quietly this month. "Microfinance is meant for the edges of the banking world," he explains. "Kiva Zip is on the edges of Kiva."
"It’s really expensive to reach rural Kenyans," he offers as an example. "Sixty-five percent are outside the reach of microfinance institutions and banks. Literally outside the reach of a branch." Kiva Zip uses mobile money transfer to cut the cost of loan delivery, and an evolving system of trust ratings to screen the potential borrowers.
The pilot is up and running in Kenya and in Kiva’s home city of San Francisco. In Kenya, the loans are distributed via M-Pesa, the ubiquitous system of mobile phone money transfer. No home visit needed, or fewer anyway. In the U.S., Kiva Zip will use PayPal.
But turning to new tech to lower loan costs is only part of the pilot. The other is how a web surfer in the U.S. can sort out which Kenyan farmer—or Mission District baker—is the right bet. Borrowers can’t just sign themselves up for loans on Kiva Zip; a Kiva approved "trustee" has to nominate them. "Instead of using a microfinance institution, we’re using a trust network," Shah explains.
Zidisha, a smaller microlender, has been using the peer-to-peer direct lending model for poverty fighting with a default rate of 0.38 percent. So far they’ve distributed about $100,000 since 2009. Kiva moves $1 million every four days. If anyone can make direct lending work, it’s Kiva.
Shah sees the company as artists moving into a blighted neighborhood. Kiva will go where other large lenders won’t, to show it’s safe and spark other companies to expand the reach of the industry. That is, after all, what Mohammad Yunus and his Grameen Bank did four decades ago when he employed a "village banking" model and proved poor aspiring entrepreneurs could be reliable borrowers even without collateral. Similarly, Kiva’s push to lend where loans don’t currently work is based on leveraging social capital.
That’s where Kiva Zip "trustees" come in. Sabrina Haman of the Mission Economic Development Agency—which advocates for low- and middle-income Latino families in San Francisco’s Mission District—vouched for two borrowers on the pilot site. "We work with them on different spectrums, other than their business," she says. "We know about [their] personal finance, too. We are willing to be more flexible than a financial institution because they don’t get to see all that."
Victor Caicero is one of MEDA’s endorsees. He wants to expand his new business, Cafeto Coffee Shop. About three weeks after he posted his loan request on Kiva Zip, he is most of the way to getting a $5,000 loan. "I already know what I am going to buy with that money," he says. "We need new stuff like a meat slicer, an ice maker, and a refrigerator."
He opened Cafeto after seven years working for another local cafe, funded with $15,000 from a personal bank loan with his home as collateral, along with savings and support from friends and family. Banks said no to him when he wanted a business loan. He couldn’t prove to a local microfinance institution he had enough work experience, in part because he hadn’t been in business long enough.
Haman’s convinced that doesn’t mean the borrowers on the site are a bad risk. "I have full confidence that [Caicero] will make good his commitment," she says based on her personal knowledge of him. Even if they were, the average Kiva lender puts up $25, not a disaster if it vanishes. That helps increase the risk tolerance for users. And the average loan size is just $250 to Kenyan borrowers and $4,000 in the U.S. The small scale keeps defaults from devastating any one lender’s assets. But nobody likes to lose their money. So the trust network remains an important, if still experimental, aspect.
Kiva Zip limits the number of loans that a given person can vouch for, to avoid any binge endorsing. But endorsers like Haman can be endorsed themselves by other users, say, by another Bay Area economic development worker. The more a trustee gets endorsed over time, the more loans she can endorse for borrowers. Shah’s hoping "trustees" will emerge as stamps of approval. "That’s the largely unproven idea we’re trying to test," he says.
Shah argues that can be a substitute for a high credit score. He suggests the administrator of a beauty school could, say, vouch for the top three graduates each year. So does that mean they will be safe loans?
"I don’t know, is the short answer," Shah concedes. This experiment could dramatically increase risk to lenders. It could lead to more pronounced funding biases. For instance, Kenyan borrowers on Kiva already get funded several times faster than Bulgarian. Skin tone even plays a role within countries. Currency fluctuations between borrowers and lenders could be the difference between full and partial repayment.
"This is truly on the edge of what we’re doing," Shah says. "Who knows what the repayment rate will be. But if we can figure this thing out, we can port it over to the main Kiva website and share [techniques for reaching new borrowers] more broadly with the industry."