I wrote this paper as a part of the curriculum for Rural Marketing on the topic 'A Marketing Model functioning outside India, impacting the bottom of the pyramid'.
Introduction
Kiva Microfunds (commonly known
as Kiva.org) is an organization which allows people to lend money via the
Internet to microfinance institutions, which in turn lend the money to small
businesses and students. It basically funds the working capital needs of the entrepreneurs
in villages, who either have their own shop, want to start up their own business,
aim to increase the scale of their business or just want the money to educate
themselves.
It is a non-profit organization,
which has its headquarters in San Francisco. It is supported by loans and
donations from its users and through partnerships with businesses and other
institutions.
Administering Loans
Kiva primarily functions by
interfacing with the lenders on its online presence called Kiva.org. With a
mission to “connect people through lending to alleviate poverty”, and
leveraging the internet and a worldwide network of microfinance institutions,
Kiva lets individuals lend as little as $25. Kiva does not keep a cut of the
loan. Nor does it charge an interest rate to these microfinance institutions.
Kiva works with
microfinance institutions on five continents to provide loans to people without
access to traditional banking systems. These MFIs are called “Field Partners”,
and they are the ones who administer loans in the field. Kiva relies on a
world-wide network of 450 volunteers who work with the Field Partners, edit and
translate borrower stories, and ensure the smooth operation of countless other
Kiva programs.
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The people behind Kiva include volunteers,
Kiva Fellows, Field Partners and the board, and a team of employees (shown
above) and contractors. The Kiva headquarters are located in San Francisco,
California.
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Funding
Most of what
Kiva lends is primarily funded through the support of lenders making optional
donations. Funds are also raised through grants, corporate sponsors and
foundations.
History – Kiva through
the years
Kiva was started by
Matt Flannery with his wife Jessica, in 2005. In its first year, the site
featured a spinach farmer in Cambodia, a hot dog stand man in Nicaragua, a
carpenter in Gaza, a bee keeper in Ghana, and a fish seller in Uganda. Behind
each of these businesses lay a story. These stories are at the heart of Kiva’s
goal and strategy: the human connections Kiva claims to build between lenders
and borrowers have brought new lenders to the microfinance movement, and fostered
in them a new awareness and connection to the people who briefly use their
money. By telling stories, Kiva allows MFIs that lack access to capital markets
to efficiently raise money and serve more clients.
Matt Flannery claims to
have been primarily influenced by Dr. Mohammed Yunus – Nobel Peace Prize 2006
laureate, and founder of the Grameen Bank. By sticking to their idea of
“Sponsor a Business”, Matt Flannery wanted to focus on progress rather than on
poverty. During the early days when he did his research, he found out that
there had always been a historical tension between the donor/lender desire to
“know where my money goes” and the recipient organization’s need for
efficiency.
Another challenge that
Kiva faced early on was the question of whether it was better to be seen as a
charity or as a business. This was a challenge of perception. Flannery noticed
that people seemed to think in these big categories, and breaking existing
mental models proved harder than it seemed.
Also, commercialization
of microfinance institutions was another trend to be watched. If microfinance
was going to have a significant impact on world poverty, the argument went,
then MFIs needed to be integrated into the global economy and tap into the
capital markets. But an online survey showed that 50% of the potential users of
Kiva would not lend on the site if Kiva adopted the for-profit model. Rather
than compete in the commercial investment fund game, Flannery wanted to get individuals
who had never even heard of microfinance into the mix.
Legal Hurdles at the Outset
In the US, there are a
number of regulatory bodies that pay attention when you offer investment
products to the public. Such bodies protect investors from losing their money
on scams. Most notable among these is the US Securities and Exchange Commission
(SEC). The SEC maintains a definition for what is and what is not a security.
If the SEC says that you are issuing securities, they require that such
securities meet a long list of requirements. One of those was that the
businesses being invested into comply with US accounting standards. This was
not always true for a goat herder and a fish seller in rural Uganda.
Another issue was that
Kiva wanted to center around loans, not donations. They preferred to call their
users lenders, not donors, as Kiva would actually return their money, possibly
with interest. Thirdly, under the US Patriot Act, there was high scrutiny
around flow of funds to other countries. Since the initial MFIs that Kiva
wanted to focus on were in Africa and Asia, there was uncertainty regarding
such scrutiny.
Making a Beginning
The first task that
Kiva owners faced was to define exactly what, in terms of investing, were they
trying to do. There were a few high level goals that they were trying to focus
on:
- Allow internet users to make small loans to specific micro-borrowers around the world, possibly with interest.
- Connect a network of MFIs to the Kiva platforms and have them post the loan applications of their borrowers to the site.
- Create financial connection between lender and borrower whereby the lender assumes the default risk.
- Create loans between people, not necessarily organizations, where Kiva acts as a platform and MFIs act as distributors.
Considering the role of
SEC and the problems it might have created had the loans had an interest
attached with them, they would have been considered securities being offered
online. Thus, Kiva owners, after a year and a half of debating, exploring and
researching, decided to launch Kiva.org without the interest rates on the site.
The domain name “Kiva”
was initially being held by a squatter. Flannery bought it from the squatter
for $600, and till date, considers these $600 the best money he has ever spent.
The beta version of Kiva.org was launched with seven borrowers profiles online.
All of them were funded over the weekend, where the managed to raise $3500 in a
few days. Matt and Jessica were blown away! This was better than they had expected.
Kiva claims that the
following two reasons are instrumental in differentiating it from the standard
microfinance investment model:
- Kiva has a risk-tolerant source of funds: Individual internet users lending small amounts at a time have a greater appetite for risk than commercial institutions or wealthy individuals using microfinance.
- Kiva uses the internet as a reputation-building mechanism: Through Kiva, MFIs keep a track record for borrowing and paying back in real time. Users can monitor the performance of each MFI and the borrowers associated with it. Thus, Kiva claims to give organizations the ability to prove themselves through performance in a similar fashion to how Ebay allowed lesser known individuals and businesses to become major e-commerce players through credibility scores.
Camping Grounds
Kiva initially began by
having tie-ups with around twenty MFI partners in a few months of its
inception. But soon the owners realized that by limiting themselves to Africa,
they would artificially reduce their potential partner base by 90%. While many
such institutions exist in Africa, the majority are elsewhere. In fact, in
2007, Africa represented only 10.4% of microfinance worldwide; the areas of
greatest concentration lie in Southeast Asia and Central and South America. Two
factors have led to this situation:
- Africa has a low population density. Microfinance has scaled best in places where crowds of people live in close quarters. Dense populations bring down the transaction costs. The lower the transaction costs, the lower the interest rates. Higher interest rates are less appealing to the poor and thus inhibit growth.
- Microfinance does not have a very long history in Africa – it is relatively new. The first great movements of institutionalized microfinance occurred in Bolivia and Bangladesh and spread from those regions.
Kiva’s Revenue Model
Kiva divides its
financials into two separate buckets – loan volume and revenue.
Loan volume refers to
the capital that the lenders send to the entrepreneurs on the site: $25 at a
time. One hundred per cent of this money is channelled to Kiva’s partners and
then distributed to the entrepreneurs. Neither Kiva, nor its partners, as their
agreements dictate, take any money out of the money stream to the
entrepreneurs.
Revenue is capital that
flows to the organization itself to fund their own operations – rent, servers,
salaries and other expenses. They calculate the project revenue as a factor of
loan volume. Today, Kiva has two streams of revenue – “optional lender fees”
and float.
Optional Lender Fees
are essentially small donations that Kiva’s users make during check-out on the
website after making a loan. Typically, 7 out of 10 users choose to donate 10%
on top of their loan to Kiva. For instance, making a loan of $100, the typical
user chooses to pay $10 on top of the loan, bringing the total to $110. These
small donations are tax deductible and Kiva doesn’t pay taxes on any profits
made from them.
Float refers to the
revenue from the interest accruing in one’s bank account. In 2007, float was a
small revenue source that accounted for 1-2% of Kiva’s loan volume, but today
it has grown to become a greater contributor to revenue streams.
Kiva’s Product Philosophy
People are central. The first thing one notices are faces. Money
and organizations are secondary, people are primary.
Lending is connecting. At Kiva.org, money is all about information
exchange. In a sense, money is a type of information. Lending to someone else
creates an ongoing communication between two individuals that is more binding
than a donation.
Things are always changing. Every time you load Kiva.org, it should
be different. Every minute, loans are being purchased and repaid, and stories
are being told about the borrowers. This can lead to a dynamic where
philanthropy can actually become addictive.
Emphasize Progress over Poverty. Business is a universal language
that can appeal to people of almost every background. This can lead to
partnerships rather than benefactor relationships. We appeal to people’s
interests, not their compassion.
Create a Data-Rich Experience. Whenever it is possible to collect
data from the field, collect it. Over time, Kiva will display as much
information about its partners, lenders and borrowers as possible and let the
users decide where money flows.
Statistics
I end this report by
shedding some light on the achievements of Kiva represented in the form of
numbers, though I would like to admit that the impact that Kiva has had goes
way beyond mere numbers. As on 27th December, 2011 (Kiva updates
these statistics every night on its website), the following were the numbers
that stamp the element of success all over Kiva:
Total
volume of all loans made through Kiva
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$270,656,900
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Number
of Kiva users
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1,053,184
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Number
of Kiva users who have funded a loan
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661,323
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Number
of countries represented by Kiva lenders
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217
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Number
of entrepreneurs that have received a loan through Kiva
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356,106
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%
of Kiva loans made to women entrepreneurs
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80.53%
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Number
of Kiva field partners (MFIs Kiva partners with)
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147
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Number
of countries Kiva field partners are located in
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61
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Current
repayment rate (all partners)
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98.92%
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Average
loan size
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$385.48
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Average
total amount loaned per Kiva lender
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$257.58
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Average
number of loans per Kiva lender
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7.82
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