Thursday, February 23, 2006

Kiva: Micro-microfinancing

Thanks to Dave Richards for pointing out a new microfinance service called Kiva which is attempting to enable proper person-to-person loans between loan providers in developed countries and low-income borrowers in developing countries. Here is a precis of his original post:

This kind of micro-financing is about as close as most of us are ever going to get to invest (not donate) our money, helping very low-income microentrepreneurs start or expand their own microbusinesses in order to grow their income and break cycles of generational poverty.

Kiva is using technology to keep the costs of this kind of personalized service to a minimum. Here's how it works. You go to web site and browse through a selection of pre-reviewed loan applications. You get to read an overview of the borrower (including photo), what business they want to invest money in, what size of loan they are requesting and how much they have raised so far.

Once you've found someone you'd like to make a loan to, you can instantly (using Paypal) make a loan for a portion (minimum 25USD) or all of the remaining loan ask size. All of the money is managed by Kiva's web service with human intervention so it is very cost efficient and scalable.

Once the borrower has received a full funding of their loan, then they are given the loan typically with a 6-12 month repayment (with interest) period. All of the pre-screening and on-the-ground loan management is outsourced to local Kiva microfinance partners.

The partners assign a loan officer who is responsible for posting all of the loan "application" information on the Internet and to write journal entries (essentially a blog) along the way as there is new information to report. All of this information is available for easy access by loan providers (and anyone else who is interested) through Kiva's web site. Additionally, loan providers are emailed with updates when there is a new posting with one of their loans.

Kiva is also not yet (and for the foreseeable future) paying any interest back to loan providers ... the most the you can get back is the amount loaned. They are using the interest income generated to pay for operating cost which are substantial. Kiva is therefore a non-profit and is still heavily subsidised. This is a reasonable strategy. Most people won't care about getting interest on a loan of $25-100, so this works fine. In the worst case of the loan not getting paid back, your loan becomes a charitable gift.

All of that said, I really do like the concept and innovation of this approach. Using web technology (and probably mobile technology shortly), there are amazing new possibilities for connecting people to make a social impact. Being able to personally be involved in helping someone in a far-away place with the opportunity to improve their lives is very powerful.

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