From Knowledge at Wharton
Nearly everyone told Matt and Jessica Flannery that their idea -- a Web site where people could make micro loans to individual borrowers in the developing world -- wouldn't work.
Venture capitalists couldn't see how anyone could make big money on loans as small as a few hundred dollars. And foundations wouldn't support something that they saw as commerce, not charity.
"We were in this weird social entrepreneurship space, trying to fight perceptions," Matt Flannery recalls.
Today, the Web site that the Flannerys created -- Kiva.org -- is one of the hottest and hippest on the web. Kiva's 270,000 lenders -- people who typically hand over their money, via credit card, in $25 increments -- have funded borrowers in places as far flung as Tanzania and Tajikistan. So far, they have assisted about 40,000 borrowers in 40 countries and provided a total of about $27 million in funding.
Kiva, founded in 2005, has been so successful that it has already spawned imitators: eBay last year launched a lending site called MicroPlace.
With Kiva, the Flannerys have managed to merge two recent socio-economic trends -- social networking and microfinance.
Microfinance tries to improve the economic condition of people in the developing world by giving them very small loans instead of donations. It tries to marry the discipline of markets with the charitable spirit of old-style foreign aid.
Like a social networking site, Kiva posts profiles of potential borrowers. Lenders then peruse the profiles and make loans to people whom they find appealing. They can sort potential borrowers by nationality, gender, business type or level of need. Lenders can also post their profiles, and Kiva highlights individual lenders and the loans that they have made.
Once a lender makes a loan, Kiva sends the money to a microfinance institution, or MFI, in the borrower's home country. The MFI -- Kiva has relationships with about 100 -- disburses the funds and works with the borrower to ensure timely repayment. The MFI services the loan.
Kiva's lenders aren't allowed to charge interest on their loans, and Kiva doesn't charge interest to the MFIs. But the MFIs do charge their developing-world borrowers. This arrangement creates a low-cost funding source for the MFIs while also allowing them to generate money to cover their operational costs. According to Premal Shah, Kiva's president: "97 percent of our active loans are on time, and our default rate is less than 1 percent."
Kiva, organized as a nonprofit, makes the money to sustain itself through, in Flannery's words, "tips." Specifically, it asks its lenders to give a voluntary contribution to Kiva each time that they make a loan. "We get about 8 percent," Flannery says. "So if our lenders lend a million dollars, then we get $80,000 to pay our engineers and programmers." Kiva has a staff of about 25 at its San Francisco headquarters.
Early on, the Flannerys and Shah bootstrapped the Web site, paying start-up costs out of their own pockets. At the time, Matt Flannery wrote computer programs for TiVo and Shah worked for eBay. They ended up not needing to raise outside money because Kiva began to get mentions in the media. That brought potential lenders flocking to the site. First, blogs like Daily Kos picked up on it. Then the print media and PBS followed, and finally Oprah devoted a segment to it.
In fact, the demand from potential lenders has been so great that, in December, Kiva had to turn some away. All of the available loans had been funded. "It was very stressful," Flannery recalls. "People had heard about us on television or the Internet, and yet we had to refuse their money."
The dilemma underscores one of Kiva's behind-the-scenes operational challenges. It won't take just any potential borrower in the developing world; a boot maker in Bolivia can't post his information directly on the site. Kiva only takes borrowers brought to it by MFIs that it has carefully vetted, and it will suspend loans to MFIs whose borrowers have high levels of delinquent loans or whose operations seem shaky. In evaluating MFIs, Kiva considers data submitted by the organizations themselves and by independent third parties, Shah said. Kiva has devised a five-star rating system for the MFIs and shows the ratings, along with profiles, on its site.
Eventually, as Kiva collects reams of data about MFIs and borrowers worldwide, it could come to serve as something like a credit bureau for the microfinance industry, Shah says. In theory, its data on each MFI's performance could be valuable, not just to its lenders, but to big backers of micro loans like large foundations, governments and nongovernmental organizations.
In the future, Kiva hopes to track, in addition to repayment patterns, the social impacts of its loans. Today, Kiva gathers that sort of information in an ad hoc fashion. It sends volunteer fellows into the field to work with the MFIs. The fellows report back to the home office and also blog about their experiences on the Kiva website.
"At first, we had all of these naysayers," says Flannery. "Experts said, 'That's an interesting idea for advertising, but that can't scale. How can thousands of people from Uganda, Cambodia and Tanzania -- random places where the Internet doesn't work so well -- post their pictures and get people to lend to them?' The idea did seem crazy. But we weren't thinking it was going to be a multimillion-dollar business. We were thinking it would be our side project. We would see if it worked in Uganda. If it worked there, where there was an Internet cafe, why might it not work in other places as well?"