Almost twenty years ago some classmates of mine from Eastern University had the idea of connecting individual investors in the United States with individuals in developing nations who needed capital to start businesses. Investments as small as $100 would purchase the equipment and resources necessary (e.g. sewing machine, tools, seeds, etc.) to get an entrepreneur started. There were many micro-enterprise lending organizations around the world but they serviced only a small portion of potential businesses.
The business model proved to be challenging. First, there are many lenders making small loans. Second, there are many borrowers scattered across the globe. How do you ensure that loans are being made to legitimate business ventures? How do you get the lenders and borrowers hooked-up? How do you keep track of all the small financial transactions back and forth between a large number of lenders and borrowers without exorbitant overhead? When my friends were considering this model in the early 1990s, the internet was an user unfriendly Unix environment and a “web browser” was still a magnifying glass used to study the handiwork of spiders. The logistics proved too complex. But times have changed.
Now, thanks to internet technology and entrepreneurial imagination, we now have a web-based “peer-to-peer” micro-lending marketplace called Kiva. Started by Matthew and Jessica Flannery last October, Kiva connects individuals with entrepreneurs in developing nations. (Kiva is swahili for "agreement" or "unity.") They have clearly thought through the complexities of this business model and Kiva partners with micro-lending institutions to ensure the legitimacy of entrepreneurs.
The Kiva website provides a catalog of businesses needing loans for startup or expansion. Just browsing through the businesses I saw loans ranging from $80 to $1,600. No interest is paid to the lender or Kiva, and while there is no guarantee you will get all your money back, Kiva says that typical loan repayment success in micro-lending is about 95%. (The micro-lending organizations that service the loan with the entrepreneur do charge interest and you can learn more about that at FAQ section of the Kiva website.) Kiva is a non-profit corporation and, while donations made to Kiva are tax-deductible, the loans themselves are not charitable contributions.
Loan amounts can be as small as $25 and are handled through PayPal. You can check on the progress of the business through the Kiva website. This allows the lender to follow the progress of the enterprise in which they invested. Not only does the borrower receive needed capital but the lender gets an education in miro-enterprise in developing nations.
Kiva focuses on rural areas as they tend to be the most underserved by the microfinance institutions. According to their website, Kiva estimates that there are 30 million microfinance borrowers around the world but they are less than 10% of the potential borrowers. Most of their lending in their short existence has been to entrepreneurs in Honduras and Uganda, but there are also some from Gaza, Senegal, and Nicaragua. I suspect it will take awhile to build the connections to expand into other regions.
There are other organizations out there doing good work with micro-enterprise development. Christian organizations like World Vision International and Opportunity International have been at this work for a long time. Global Giving is another organization doing innovative work. What I like about Kiva is that it not only empowers the borrower but the lender as well. The lender is empowered because he or she gets to see exactly how his or her stewardship of resources improves the lives of others through a true partnership of equals in economic enterprise.
You have heard the old cliché about “Give a man a fish and he eats for day. Teach him to fish and eats for a lifetime.” With this model you just hand them the fishing gear and they repay you later, enabling you to hand someone else the "fishing gear!" How much easier can it get?
Kiva is a truly inspiring of combination of technology, economics, justice and vision.
Here are a few news stories I culled about Kiva:
- Market Wire, Oct. 12 2005, Kiva.org Merges Philanthropy and Venture Capital With First-Ever Microlending Web Site
- Acton Institute Power Blog, Nov 2, 2005, Grassroots Microlending
- Alternet, Dec. 15, 2005, PayPal-ing International Development
- CNN Money. Jan. 16, 2006, Be a global financier...on a shoestring
- BBC News, March 1, 2006, Online loans help world's poor
