Stumbled upon a micro-finance website called Kiva which sound intriguing. Their bona fides seem good (partners include Google, American Express, Microsoft, and other blue-chip corporations), and their mission is one I support, as an entrepreneur myself, and as a citizen of Earth. Microfinancing, as it is called, is a fairly recent innovation, giving small cash loans to those tiny businesses around the globe that are too small to attract attention from corporate banks.
I had not heard of this organization until today, but apparently they have been in the public eye for a few years:
Kiva’s business plan was quite straightforward: An online platform would allow ordinary people to invest in small and medium enterprises (SMEs) in the developing world. (See “Kiva’s Loan Cycle” on page 70 for an overview of how Kiva works.) Users would log on to the Web site to read the personal accounts of Kiva’s carefully chosen borrowers and then use their PayPal accounts or credit cards to lend as little as $25 to a borrower. On-the-ground MFIs would then administer the loans to the borrowers. Users would get their money back over the course of a year, with the option of either relending the money or pocketing it. While the loan agreement was in place, users would also receive frequent updates about their borrowers from the MFIs.
Despite the simplicity of their model, Flannery and Jackley ran into a tremendous amount of resistance from microfinance experts. “The criticisms were about both the supply side and the demand side,” says Jackley. “On the supply side, critics said that the idea wasn’t scalable because of the time and effort needed to vet borrowers and then to post their stories on the Web. And on the demand side, the critics said, for whom is this product intended?” The microloans were neither investments nor donations. “No one knew what to do with this bizarre, in-between product,” she says.
Another issue was how much interest (if any) Kiva could charge borrowers and return to lenders. Kiva’s founders originally wanted to offer lenders the option of earning interest on their loans, both to attract lenders and to transform the usual wealthy donor-poor beneficiary hierarchy into the more egalitarian lender-borrower relationship. Yet returning interest on loans could have turned the loan into a security in the eyes of the Securities and Exchange Commission (SEC). Offering a security to the public would trigger a long list of SEC requirements, including sufficiently collateralizing the loans and investing only in entities that comply with U.S. accounting standards.
Kiva’s founders also debated whether to be a nonprofit or a for-profit organization. Establishing Kiva as a nonprofit was the fastest way for the founders to get the site up and running. Yet they could not readily ascertain whether a charitable organization could extend loans rather than donations. They were also unsure what tax implications Kiva and its lenders would face upon the return of the loan principals and, should they charge interest, profits.
Finally, skeptics doubted whether Kiva could actually help lift many people out of poverty. A common theory circulated that, for microfinance to have a significant impact on world poverty, MFIs would need to be integrated into the global economy and to tap into the capital markets. Yet most MFIs did not qualify for commercial-grade investments. Rather, they relied on donations, especially during their early years of operation. Observers questioned how Kiva could find enough appropriate MFIs with a reasonable number of borrowers to help the organization establish a creditworthy track record.
[Click to read more of Stanford Social Innovation Review : Articles : The Profit in Nonprofit (May 20, 2009)]
Kiva explains how the process works:
The below diagram shows briefly how money gets from you to an entrepreneur, and back.
1) Lenders like you browse profiles of entrepreneurs in need, and choose someone to lend to. When they lend, using PayPal or their credit cards, Kiva collects the funds and then passes them along to one of our microfinance partners worldwide.2) Kiva’s microfinance partners distribute the loan funds to the selected entrepreneur. Often, our partners also provide training and other assistance to maximize the entrepreneur’s chances of success.
3) Over time, the entrepreneur repays their loan. Repayment and other updates are posted on Kiva and emailed to lenders who wish to receive them.
4) When lenders get their money back, they can re-lend to someone else in need, donate their funds to Kiva (to cover operational expenses), or withdraw their funds.
[From Kiva – How Kiva Works]
For me, whenever I am feeling depressed or angry at the world, especially around holiday season when I cannot squeeze in a trip home to see my family, I donate to food banks or other charities. I don’t talk about it with anyone: not relevant, but the simple act of anonymously sharing money with others who need it more than I do elevates my mood. When I think about it, I am extremely fortunate to be in the financial position I am in. I may not have a retirement fund, I may only have a few thousand dollars in the bank, but I’m fat and well-fed, with no material needs unmet.
Anyway, I’m reluctant to continue this thought, suffice it to say, I joined Kiva.org, and will be circulating some of my money there. You should too.
The most irritating aspect of Kiva.org is their insistence that lenders use PayPal. I don’t really prefer to use PayPal for any transaction that I don’t have to. Since I just had some cash deposited in my PayPal account, I’ll use that. I wonder if PayPal gives them a more favorable fee structure?
Oh, there is the hidden link to use a non-PayPal account. You can just donate money using a credit card after all. Well, why not, I’ll do that too…