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Lending Money through Kiva

This is a column by regular MDJ contributor Clark.

Kiva is a non-profit organization that offers an avenue for individuals to loan money to low-income entrepreneurs across the globe. FrugalTrader had written about the Kiva organization during its infant days and I think that it might be worth revisiting them again through my personal experience. The money loaned is used by the entrepreneurs to buy cattle, start/expand their grocery store or restaurant or for a host of other small businesses. Since these loans are given to the working poor, there is a risk of principal loss to the individuals (the lender) and Kiva does not guarantee repayment of these loans or a financial return on these loans. To put it bluntly, this is not a peer-to-peer lending investment vehicle like Lending Club or Prosper.

Why it works?

Kiva taps into the core beliefs that most human beings have generosity and empathy and underscores the fact that many poor people are willing to work hard and become successful, if presented with an opportunity. It should be noted that Kiva does not currently take any share of the interest rate charged by Field Partners and relies on voluntary lender donations, corporate partnerships and institutional supporters to run their operations. The entire structure depends on the collective efforts of (in no specific order) these support organizations, individual lenders, Field Partners and Kiva’s team of staff and volunteers. An examination of their statistics will offer an insight into their success till date. Please browse their Risk and Due Diligence page for each party’s role in sharing the risks.

The Entrepreneurs and their Interest Rates

Typically, poor people do not have financial assets to start a business on their own or use as collateral and may be illiterate (to fill out a loan application at the bank). They are prime candidates for falling prey to private loan sharks who charge exorbitant rates of interest and use the borrowers’ lack of literary skills to their advantage; usury is common among those circles. Banks do not provide microfinance products as it is not a commercially viable venture.

The entrepreneurs who get loans through Kiva still pay a high interest rate (but way less than that charged by their local private money lender). This is due to the fact that the costs of the money lent and loan defaults are correlated to the amount lent, while the costs of actual transactions take their toll too. According to CGAP,

“At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can’t be cut below certain minimums.”

Kiva reports the interest rate charged by the Field Partner in terms of portfolio yield. The portfolio yield is not the exact cost of borrowing money for an entrepreneur. Instead, it is the total return for the Field Partner from its lending operations. Based on the type of loan, an entrepreneur may have an interest rate that is higher or lower than the portfolio yield for the Field Partner as a whole. Nevertheless, the portfolio yield seems to be a good measure of the average interest rate and fees paid by the entrepreneurs to Field Partners.

Based on Kiva statistics, the average interest rate and fees charged by Kiva’s Field Partners is about 36% (as of March 2010). You can find more information on the interest rates that Field Partners charge by navigating to the Field Partner pages, choosing the Field Partner that you would like to research and looking under the header “Borrowing Cost Comparison” on the lower half of the resulting page.

Choosing Entrepreneurs

How does one pick entrepreneurs to lend to? There is no denying that all entrepreneurs may be genuine since the Field Partners do their research and interview the borrower before posting their profile on Kiva. Nonetheless, circumstances may render a person unable to repay their loan. I think that there are two ways to go about it:

1. Treat it as a form of charity, albeit one where the Field Partner is bound to charge interest and benefit while providing an avenue for poor borrowers to uplift their own lives. If the loan is repaid in full, then another entrepreneur may benefit; else, if the lender is still willing and has the money, they could continue lending or find an actual charity.

2. Check the risk rating of the Field Partner and then lend. Field Partners serve as the face of entrepreneurs and the ability of entrepreneurs to repay their loans is reflected in the Field Partner Risk Rating that is given by Kiva staff. A Field Partner Risk Rating of five stars symbolizes lower risk and a single star indicates higher risk. The rating is governed by the evidence of the likelihood of a Field Partner repaying a loan, which is contingent on the entrepreneur’s ability as well as the Field Partner’s reliability.

My Experience and Thoughts

I wanted to test the waters and lent $25.00 in mid-Dec 2009. I chose the borrower based on the Field Partner’s risk rating and decided on one with a 5-star rating. The entrepreneur wanted a US$350.00 loan to increase the inventory for her home-based grocery business. Her loan was covered by 12 lenders (including me). Till date, I have received US$20.83 back in my account. The entrepreneur is on track to fully repay her loan, as originally slated, by June 2010.

Before deciding on an entrepreneur, I like to read about them to know a bit about their background. As an example, a single mother with three kids will get my attention than a couple with one kid. I understand that the number of kids alone may not be a true manifestation of a family’s situation but I believe that the higher the number of kids, the greater the chances that the elder ones will be (are being) pushed into the labor force to support the family. Maybe, the thousands of small contributions like mine will help them steer clear of that situation. This may not be the best way to make a decision but to each his own!

One aspect that could do with some streamlining is the free rein that the Field Partners currently have to set interest rates. I agree that their rates are still lower than that charged by the local money lenders but I find it tough to accept that some Field Partners need to have as high as a 53% portfolio yield to sustain their operations. The lenders, Kiva and the supporting organizations may treat this endeavor as a noble one but I wonder if the Field Partners got the message?

One Can Do More

In addition to lending money through their website, one can do other things to help Kiva in eradicating poverty. Please check out the various other ways through which you can spread the word and make a difference.

About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.

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About the author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.

{ 21 comments… add one }
  • Rachelle May 4, 2010, 10:09 am

    The interest rates seem very high until you consider that many of the small businesses started right here in Canada are to a great extent financed through credit cards at high rates of interest.

    As one of my entrepreneur friends noted… if you have money the banks will lend to you, if you need money forget it.

    This was my experience as an entrepreneur. People who are self employed have a hard time even getting a mortgage.

    I think the lowest interest rate I had on my credit cards was 19.99 %

  • Chris J May 4, 2010, 10:10 am

    Good post, and good job for encouraging people to check out Kiva.

    I’ve been a “microlender” since late 2007, when I saw a feature about Kiva on PBS Frontline/World, and saw the good work that gets done, and how ordinary people can put money to good use over and over again.

    I’ve had the same $250 for over two years and have rolled it over into 25 different loans, mostly to people in Afghanistan. It really is the gift that keeps on giving, and I can pull it all back eventually if I want.

    The interest issue you raise is really a red herring. The fact that business people in impoverished countries people can get money for their enterprise is remarkable, and even if they had to pay 40% interest on a small loan is peanuts compared to the fact that the borrowers can grow their enterprises and achieve the satisfaction that comes from doing it themselves. Besides, the interest goes back to a not-for-profit organization used to help other people. It’s basically a forced donation to those who are successfully using the program. No harm done.

    I’ve included a link to my Kiva lender page so people can check out my lending history and preferences.

    Kiva is really a great way to help ordinary people around the world to help themselves. It makes good sense to me.

  • Clark May 4, 2010, 12:24 pm

    Thanks for the comments.

    @Rachelle: You are right wrt financing though I wouldn’t want to compare Canadian small businesses to the Kiva ones. Most Canadians have basic amenities including decent public schools. Many entrepreneurs on Kiva would be overjoyed to have these essentials and possibly be grateful for life. My point is that just because they are from an impoverished country, it shouldn’t have to be that they need to pay higher rates. Yes, there are administration costs involved but the Field Partners get 0% interest capital from Kiva. Correct me if I’m wrong!

    @Chris: If I understand it right, you are saying that the interest money goes back to a not-for-profit organization, which would be the Field Partner. I’ve checked the prerequisites to become a Field Partner but could not find anything to substantiate that Field Partners are non-profit organizations.
    http://www.kiva.org/partners/info
    Please let me know if I’ve overlooked the relevant info.

  • Iain May 4, 2010, 12:47 pm

    Another site that provides a similar service is opportunity.org

    It would be interesting to compare interest rates of field partners.

  • comeleon99 May 4, 2010, 1:08 pm

    For people who want help choosing a loan, http://www.kivabank.org is a great application which lets you narrow you search on various criteria.
    I would also recommend people check out http://www.medatrust.org/. It is similar to Kiva but is based in Canada, and you get a charitable contribution receipt for the full contribution. This is because after 18 months of relending the money it is donated to the organization (i.e. you cannot withdraw your contribution like you can with Kiva). But they sometimes have matching programs from the Government. For example the last time I contributed to a borrower in Afghanistan the Canadian Government matched my donation.

  • tiggerzzz May 4, 2010, 2:05 pm

    I actually gave my wife a gift card in her name through Kiva for her birthday.

    It allowed her to choose the person that she wished to help and she really like the personal aspect of choosing where her loan was going.

    She also likes tracking the loan repayment.

    She actually chose a high risk loan but it has luckily been paid on time for most of the payments.

    She likely will not get all of her loan back due to currency fluctuations even if it is repaid in full but still feels that it was worthwhile.

    She often mentions how she has an internal desire to help others in developing countries but has never been able to satisfy this need until now.

    It was definitely a win win situation for all involved parties. Someone who needed a loan rcvd one, my wife satisfied an intrinsic need and I got away with giving a super easy gift that didn’t need to be exchanged or returned.

  • highlandjen May 4, 2010, 3:35 pm

    I’m curious to know how those who are participating in Kiva already and have earned interest, account for that interest income with CRA. It sounds like a great idea and I’m definitely going to check this out. I think it would be a great exercise for my family (with two ‘tween kids) to participate in.

  • Clark May 4, 2010, 4:01 pm

    @highlandjen: Kiva, as highlighted in the post, is not an investment vehicle; so, there is no interest to earn. You can lend money to poor entrepreneurs but there is no financial return (interest) or guarantee for return of principal. If the entrepreneur defaults on the loan, then you lose the money that you lent!

  • Stephen May 4, 2010, 4:17 pm

    I am not really qualified to make this comment, so take it with a grain of salt. I think Kiva and other organizations like it are fantastic ideas. However, I read somewhere (can’t remember where) that these organizations don’t actually guarantee that your money go to the specific person you select on their website even though you do select a very specific person.

    Has anyone else heard this or does anyone have proof that the money does indeed go directly to the individual whom you loan it to?

    Upon further reading of the Kiva site it appears that the Field Partner actually issues the loan in advance before all the funding is raised and they get “back filled” as money comes in. So I guess the loan money doesn’t come directly from the sponsor … but it appears they keep close track of the repayments and those repayments are indeed divided up according to which lender sponsored which person.

  • Stephen May 4, 2010, 4:29 pm

    I guess Wikipedia has some decent coverage of the controversy and it is summed up fairly well:

    http://en.wikipedia.org/wiki/Kiva_%28organization%29

  • badcaleb May 4, 2010, 8:54 pm

    I think Kiva is great. I have been lending through them for the past few years. Funny enough, I have never even looked at the risk rating. I look at it as a donation and if I get funds back that goes straight to another person. Have always been paid back. This blogger wrote a great piece on the merits of Kiva not being a direct person to person lender. http://www.mymoneyblog.com/index.php?s=kiva

  • Aury (Thunderdrake) May 4, 2010, 9:06 pm

    Wow. This is.. A rather interesting oppurtunity, to say the least.

    Being that I’m a conservative investor, I’d be more than happy to place a small portion portion of my portfolio into a system of financing like that. Not that I’d dump it into Kiva just for this article. I got a LOT of homework to do if I want to invest in something like that!

    Talk about a BIG time oppurtunity. Big risk, big gains, and little capital to get started. Not too shabby.

    I’m going to look more into it’s credibility and see if I can find some success case studies on both the lender as well as the entrepreneurs.

  • Ron May 4, 2010, 9:14 pm

    Has anybody tried Lending Club or Prosper?

  • used tires May 5, 2010, 4:25 am

    The disadvantage of non-profits is the soundness of the projects they finance. Since they are not answerable to shareholders(donors) once they receive the money, there is no mechanism to find out whether the projects are beneficial which in a commercial(for-profit) world is measured in terms of Net Present Value. Though it is difficult to measure the NPV of some projects such as education where real benefits occur over a longer duration and are difficult to monetize, other projects benefits can be fairly estimated. This is where the for-profit charities such as Google Foundation(google.org), Acumen Fund etc come into picture. They provide loans/funds at below market interest rates in addition to project/business support but the funds have to be invested in projects which are beneficial to people and commercially viable.

    Further, since the beneficiaries have to return the money they have to think through their proposals and have concrete plans. In addition this reduces corruption since the beneficiary has to repay unlike in the case of non-profits.

    Till then,

    Jean

  • This is why I opened an ING account May 5, 2010, 11:38 pm

    I see too much risk in lending to entrepreneurs as the failure rate is high.

  • Ms Save Money May 6, 2010, 6:25 pm

    I’d heard about this and I thought it was a really generous and nice idea. I would certainly appreciate the help if I were in their shoes.

  • Janet May 6, 2010, 7:15 pm

    I think Kiva is great! In fact I think it is awesome, however, I wish to ask the question why don’t we do something like this here in the states. I can think of tons of folks at the bottom if they only had a little life would change so drastically for them!

  • Aman@BullsBattleBears May 8, 2010, 2:04 pm

    Kiva is a great way to help others..I have been using Kiva for a couple of years now and have been playing with the same $300 for a while now. Its great to know that a small amount is helping people in other countries in a big way.

  • Joseph N. Green May 17, 2010, 1:33 am

    Me and my wife are trying to buy our first home. We do not have enough credit to borrow money from a bank or lender. We have no money saved up, and would really love to have our own home.

  • Financial bondage June 28, 2010, 5:55 pm

    Never tried kiva but I have heard of it. seems like a great idea.

  • Clark September 22, 2010, 8:51 pm

    Kiva has started to offer loans to students in Bolivia, Paraguay and Lebanon and hopes to expand to other countries soon.

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