Entries in Kiva (12)


With microfinance, more transparency (and realism) required

Today's NYT offers yet another set of indictments against microfinance. The charges are: 2) interest rates are unfair and exploitative, 2) banks are making profits off ventures originally meant to be charitable; and 3) loan pricing is not transparent enough to consumers.

As a lender myself, I too have questioned the high interest rates charged by the major lenders - at Compartamos, the average rate is 84% - but let's be honest, lending in micro-amounts to the poor is an expensive proposition. It's considerably more expensive to lend 10 loans of $100 than 1 loan of $1,000 especially if none of those people has any credit history, nor employment history, or even access to a bank. If I lend someone $100 for 1 monts divided into two payments at an 18% interest rate, I will make 75 cents and that probably doesn't cover my costs. I don't doubt there is abuse in the system - just as payday lenders and other loan sharks abuse financially illiterate American consumers, but interest rates that seem high by our American standards are not necessarily exploitative.

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For transparency...in government and p2p micro-lending at Kiva


Lawrence Lessig's article "Against Transparency" in The New Republic has sparked a lot of debate about the perils of going down the road of "naked transparency".  Lessig fears open data for government may end in citizen cynicism and withdrawal from the political process. Rather than being actually against transparency, he makes clear in his follow-on article and this interview that his real concern is that people will see transparency as the sole answer rather than the necessary combination of transparency + meaningful campaign finance reform.

I agree that transparency is not a panacea, but I believe he overstates the "perils" of open data. Take a look at the Sunlight Foundation's display of health care lobbyist contributions to Senator Max Baucus, author of the current main health care reform bill being debated in Congress. Will citizens reach "unwarranted conclusions" upon seeing the nearly half a million dollars Senator Baucus received from these lobbyists while he was shaping health care reform? It's a scandal that such a revelation does not lead his career to "be destroyed".

Of course, Prof. Lessig is in support of such thoughtful analyses and he is right to bring up the broader reform issues.  I believe we need more of the kind of transparency and analysis that the Sunlight Foundation has fostered, but the cynicism question raises an important point. One can imagine a scenario in which people are participating in a process that is ultimately good while ignorant of some of its messier internal mechanics. Should that process be made transparent at the risk of alienating the participants or is ignorance really bliss?

Take the case of Kiva. Yesterday the Harvard Businesss Review pointed out that the peer-to-peer lending platform tells a story that is not entirely true. A large part of Kiva's appeal for lenders is the implicit promise that your money goes directly to the needy entrepreneur of your choosing. In reality, the $25 that you donate on Kiva to Ndidi Bienose, for example, is routed through his sponsoring NGO, Lift Above Poverty Organization (LAPO). LAPO collects all lender money and in turn distributes it to their entrepreneurs. This is one reason for the unexpectedly high repayment rates of Kiva (~98%) -- individual losses can be easily disguised within a group under an NGO. Microplace uses the same model, but has always been straightforward about it.  Kiva, however, has been vastly more successful because of their more appealing, albeit untrue, story.

This unplanned transparency could turn into an example of what Lessig fears: that the exposing of the behind the scenes action will turn previously happy do-good Kiva lenders into cynics who now see P2P micro-lending as just as corrupt/misleading as the more traditional forms of aid that it hoped to supplant. Due to the attention problem that Lessig identifies, lenders will not take the time to learn that the end result of Kiva's and Microplace's approach is actually more effective and more efficient than direct peer-to-peer lending.

It's too soon to tell whether some Kiva lenders will be turned off enough by the revelation to stop participating, but I'm optimistic that the real Kiva story can be told effectively.  There is a powerful fact that Kiva can stand behind : Lending through a field partner is more reliable than direct lending and smooths the process for the benefit of the entrepreneur that the lender is hoping to help. The bottom line of Kiva remains the same -- to alleviate poverty through microloans -- and in the end, your money still goes to Ndidi Bienose. In Seth Godin's parlance, the P2P story is still authentic, even if it is not entirely true.

So is the new transparency in Kiva a good thing? A few lenders may be lost, yes, but the ones who remain will have full knowledge of the process and will no longer be duped. The strongest and most engaged communities are built on honesty. The same is true of government.

Flickr credit: bgblogging via Creative Commons, where I get all my photos and a concept for which I thank Lawrence Lessig for pioneeering


The Kiva community is still mixed on the move to welcome U.S. entrepreneurs

Kiva's recent poll of its members shows that there remains a sharp divide among lenders regarding Kiva's recent pilot program for American borrowers: 48% are in favor, 44% are opposed, and 9% are unsure.

As we profiled earlier, upon the announcement that Kiva would open its doors to borrowers not only in the poorest countries but to those in the U.S., many Kiva forums exploded with cries that this decision was counter to the Kiva mission to alleviate poverty. We never quite understood that rallying cry, since lenders, after all, retain full freedom to choose the recipients of their funding and there are plenty of Americans living in poverty. A more serious complaint, perhaps, is that such a move would divert money from the neediest borrowers, where the poverty is more extreme.

Kiva's study proves that this is not the case: lending is up across the board. June was a record month for the peer-to-peer microfinance lending site:

  • Excluding the U.S., more loans were made to the developing world than ever before -- $4,682,025
  • 4.6% of the loans were made to U.S. borrowers

Regardless of whether you agree with Kiva's policy, you have to admire how much they are engaging their community around the issue. This is one reason why social lending will continue to be the way of the future -- communities on both sides of the transactions have a say in how it is evolving.


Five things to ask yourself if you are interested in social lending

There is significant buzz around the concept of social lending these days. From the dramatic re-opening and prompt re-closing of Prosper Marketplace, to the calm (and dare I say bank-like?) steady returns of Pertuity Direct, mainstream borrowers and lenders across the spectrum are wondering whether social lending may be a legitimate pursuit. But who is it for? Is it an alternative reliable source of returns for investors? An option for borrowers who seem to have no other options? A platform to lend to the working poor around the globe? A risky, high-payoff avenue for lenders? A way to feel good about helping people reach goals that you support?

The truth is that social lending is an incredible diverse market space. If you’re thinking about entering the social lending sphere, ask yourselves these questions to know which platform may be right for you:

  1. What originally drew you to social lending? I see three main classes of people interested in social lending: 1) Investors looking for an alternative return stream; 2) Idealists looking for a concrete, high-impact way to contribute to social good; and 3) Casual lenders intrigued by the possibility of cutting out the bank to earn returns and create a more transparent financial experience. You should know immediately which type you are—investor, idealist, or casual lender—and your options will narrow considerably based on these goals.
  2. How much personal connection are you looking for? As the term “peer-to-peer lending” has evolved to the broader “social lending”, some sites are moving away from the direct p2p connection. Pertuity Direct, for example, has very consciously tried to move to the mainstream lending market by relegating the typical “borrower profile” to an optional community page. Instead, lenders buy into a pool of borrowers of a given asset class. This approach is excellent from an efficiency standpoint—no need to browse through profiles to try to create your own diversified portfolio—but the lenders looking for the feel-good sensation of getting to know your borrower will be disappointed. Lending Club offers the more traditional profile-browsing approach which gives you a direct connection to your borrowers. On Kiva and Microplace, you choose a microfinance institution who finds individual micro-entrepreneurs according to filters—in your chosen country, target demographic, etc.—whereas on LendforPeace, the entrepreneurs are all Palestinian. Through Virgin Money, you simply formalize deals with people you already know; no new relationships are gained, rather the site creates the framework to help prevent existing relationships from deteriorating when they are complicated by a financial bond. The latest entrant Unithrive connects Harvard alumni with current Harvard students – the possibility for a durable bond between individuals is there with both the financial and university connection.
  3. How much risk are you willing to take? Initial challenges with high default rates when the p2p lending space was in its infancy led to many charges that borrowers on these platforms are an adversely-selected population and lending is risky business. The industry has made great strides since then and has instituted far more stringent borrower requirements, but the risk factor is still relevant. Pertuity Direct and Lending Club are the only two companies that are registered with the SEC, so if the government’s blessing matters to you, your options are quite limited. The international microfinance sites have very low default rates (1.7% on Kiva). Pooled lending, like on Pertuity Direct, achieves the highest rate of diversification, but if you’re willing to accept the risk, you can choose borrowers paying a higher interest rate based upon their profiles at Lending Club. Prosper is still shut down, but many early lenders were burned on the site – often due to their own lack of judgment, but an issue nonetheless.
  4. Do you want to make money? At Kiva and LendforPeace, p2p microfinance sites, you earn no interest, but the sites offer a high-impact way for you to park additional money (as little as $25). At Microplace, you can earn up to 6% interest (although most investments fall more in the 1-3% range). At Pertuity Direct, the average interest rate is around 13.4% (minus fees). Lending Club claims a 9.05% average annual performance.
  5. Are you interested in a particular cause? Many sites target very niche markets. If you are appalled by the usury of payday lending, check out alternative Yadyap (“payday” spelled backwards). Passionate about education financing? Look into People Capital or Unithrive. If you are looking to provide economic opportunities in Palestine, LendforPeace is your site. To help mainstream American families, Prosper and LendingClub are the best known.

Kiva's opening to American entrepreneurs is not welcomed by all...

Apparently it's the worthiest endeavor to lend to those in dire poverty, and less so to lend to those who are only really poor. Or at least so says some of Kiva's most committed supporters who are disappointed by the microcredit p2p platform's move to allow US micro-entrepreneurs to compete for loans on the site.

As we profiled the day it was announced, Kiva began as a site to lend to the poor in Africa, but has been expanding to developing nations around the world, and earlier this week, announced that it would open to its first developed country: the United States. Americans have long dominated the lending side of the equation, and many Kiva supporters are worried that now that American borrowers can also list profiles on the site, that precious funds will be diverted from those who need it most.

What do you think? Kiva is advertising this poll to hear from their supporters: http://answers.polldaddy.com/poll/1720762/


Kiva opens to US entrepreneurs

Beginning today, US entrepreneurs will now be able to seek loans on kiva.org. Originally a site to lend to micro-entreprenuers in Africa, Kiva has now established itself as a truly global destination to facilitate lending to help alleviate poverty.The move to the United States comes at an opportune time. With the credit crunch, this is a tough time for aspiring small business owners to get the initial loans to get off the ground. Even formerly creditworthy individuals may find it hard to receive a small business loan. Some small business owners have already turned to p2p lending, and now Kiva also offers an alternative funding stream.

The timing of the launch is interesting for another reason: An article in yesterday's New York Times reports that charitable giving fell last year by the largest percentage in five decades. Kiva is still an interest-free investment. Might domestic micro-lending revitalize poverty alleviation efforts in the US? Will more donors feel inspired to provide p2p loans rather than donate to charity (as we've discussed before)?

Part of the answer surely depends on whether the remarkable loan repayment rates hold steady in the domestic US market (99.7%). One of Kiva's partners for this effort is ACCION USA, also the partner for Microplace. When I initially opened my Microplace accounts, I steered clear of the US borrowers facilitated by ACCION USA because they offered the lowest average repayment rate (more like 94%-96%). Just now when I researched to confirm those numbers, I see that Microplace has eliminated that statistic entirely across all of its loans. Why? Regardless, it will be interesting to see how the repayment rates of domestic loans compare to rates of the international loans.


A free market approach to transforming international development

Drip Irrigation in Sri LankaWe have covered a number of emerging market-based approaches to charitable giving: p2p microfinance, social lending, and prediction markets.

Acumen offers another essentially free market solution to charity: patient capital. Integrating principles of investment banking into traditional donor-based charity, Acumen is seeking to transform the western world's approach to development.

The fund collects money from donors much as a traditional charitable outfit, but then rather than purchase food, mosquito nets, etc. it lends to or invests the funds in local ventures that provide broader social benefits such as internet cafes or irrigation companies.

This approach is much like the Kiva or Microplace model, but writ large. Rather than a p2p connection, Acumen enables direct entrepreneur lending on a much greater scale. Instead of helping a woman with a $500 loan to expand her small livestock business, like on Microplace, through Acumen, you can contribute to a $1.5 million investment in Mumbai to expand the city's ambulance fleet. Acumen also is painstaking in its analysis of exactly where the money goes and the social value that it brings.

In an interview with the Economist, founder Jacqueline Novogratz explains why she believes now is the time for this type of innovation in international development:

“The financial system is broken, yes, but so too is the aid system... a moment of great innovation [could be at hand]."

Ms. Novogratz here hits on the theme that we often try to promote: that while capitalism is currently in doubt, there are plenty of thriving examples of places where free market solutions are leading to plenty of social good.

Flickr credit: zumerzetbill


Microfinance to "return the economy to health"

Mohammed Yunus, Nobel Prize winner and founder of Grameen Bank, the first microfinance institution, has a suggestion to help lift the world out of the current crisis: microfinance loans. He made his name lending small sums of money, less than $2,000 to poor women in Bangladesh, but he sees hope in extending the concept through the developed world.

As covered by Forbes Magazine, during recent remarks at the Foreign Correspondents Club of Japan in Tokyo, Yunus "cites a program his bank started last January in New York City's Jackson Heights section, a low-income neighborhood in the borough of Queens that is home to many immigrants. Grameen America disburses loans averaging a paltry $2,200 to women there. Although New York has been hit hard by unemployment tied to the financial turmoil, Grameen's repayment rate there is still 99%, Yunus says: "In the same city where big banks collapsed, we're untouched by the crisis."

Yunus believes that microcredit could  spread across the United States as big banks contract. Grameen has attracted the interest of Susan Buffet from Berkshire Hathaway and is considering opening up branches in several U.S. cities. He hopes that microcredit can eventually replace payday loans and check-cashing shops: "Although we live in a world where we deal with billions of dollars down the block, people are looking for much smaller sums."

If you're interested in being a lender to international microfinance institutions, try out two peer-to-peer sites, Kiva.org and microplace.com.

If you're interested in being a peer-to-peer lender domestically, see our review of all the major players. Soon-to-come is a site directly focused on the payday loan market, YadYap.


Microfinance P2P lending platform Microplace claiming increasingly high returns

Microplace, a peer-to-peer lending site focusing on the niche international microfinance market, is bucking the current downward financial trend and offering increasing rates of return for its lenders. A competitor to Kiva, Microplace (an Ebay company) offers a similar line about how small loans can make a real difference in the lives of entrepreneurs in developing nations. By contrast, Microplace's loans are securitized, allowing its lenders to charge interest (set by the site) on their loans.

Microplace has claimed a progression of "average returns" since its foudning. The recent trend is impressive:


Kiva's astounding stats for this week

Amazing. This week alone at Kiva:

$1,035,800.00 lent

4,982 new lenders joined

3,277 entrepreneurs funded

1 loan every 17 seconds

 These niche peer-to-peer marketplace for entrepreneurs in developing countries is demonstrating incredible vitality in an otherwise dismal market


China: The Newest and Oldest Fan of P2P Lending

,According to an article published earlier this month, p2p lending is gaining traction in China. The inability of individuals and small firms to access credit from state-owned banks has spurred internet p2p lenders, such as leader CreditEase, to fill the unmet demand.

Unlike p2p lending in the West, which is generally viewed as a new and innovative approach to lending, China is more familiar with the concept. Along with various other informal lending schemes, loans between individuals are legal and common in China. According to some estimates, informal lending might account for 10 to 20 percent of the country's total lending. Thus, the emergence of platforms like CreditEase are more indicative of a change in venue—the internet instead of the street—rather than a new access point to credit.  This may help explain the Chinese government's relaxed response to budding internet p2p lenders.

Innovative or not, CreditEase has generated US$29 million in loans since 2006.  Although much smaller than p2p giant Prosper, this amount is close to the US$33 million loaned by Kiva after about 3 years of operations.  The platform operates by selecting borrowers and then diversifying investors' funds among numerous loans. With reported returns of over 12 percent, and defaults under 1 percent, CreditEase seems bound for smooth sailing.

What will be interesting to see is whether the demand for CreditEase’s services will continue to grow. China’s loosening of credit quotas for commercial banks (by 5 percent) and local commercial banks (by 10 percent) may have an impact on the growth of p2p markets in the country. A recent article on credit in China mentions that informal lending flourished when credit quotas were in place and that the recently observed increase in bank loans may partly represent a flow from informal to formal lending.

Flicker credit: upton




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