Kiva: where microcredit meets P2P

Microcredit — lending small amounts of money to poor people to help them set up small businesses — is not a new idea; it started in the 1970s when Muhammad Yunus set up Grameen bank. Since then, Grameen has proved outstandingly successful, lending over $3 billion and empowering millions of people.

A new twist on this idea is Kiva, the world’s first peer-to-peer, distributed microloan website, set up by Jessica and Matthew Flannery.

Kiva’s first country of focus is Uganda, where the Internet is available even in poor rural areas. Lenders may loan money through, which lists businesses in need of funding and provides background on the entrepreneur starting the enterprise. Individuals may makes loans in increments as small as $25, and can expect to receive repayment, without interest, at the end of the loan term, which typically runs between six and 12 months. Since Kiva’s source of capital is charitably-minded individuals, it is able to provide more flexible loan terms than traditional financial institutions.

To date Kiva has funded 13 small enterprises in Uganda, including a livestock business, a medicine shop, several produce businesses, a fish monger and a clothing reseller. Two of the entrepreneurs have already repaid their loans in full. The enterprises Kiva is working with are asking for loans averaging $500, and the average lender is loaning between $25 and $100.

The Kiva website includes a list of businesses it has lent money to, another list of businesses seeking funding. Each business on the website includes details of the business and its owners, a journal written by the business owners and a page giving details of amounts lent and repaid.

It’s a small beginning at present, but I’ve a feeling that Kiva could grow into something big. Consider if these enhancements were made, either by Kiva themselves, or someone copying them:

• At the moment because of the SEC‘s rules, lenders are not allowed to be paid interest. This limits lending to charitable lending at present. If they were allowed to be paid interest (e.g. if they weren’t living in the USA) there would be a greater pool of potential lenders.

• The system works on trust. This might be enhanced if the website included a feedback system (like eBay uses) so that people could built up good reputations.

• Micro-loans are often not available to the poor, and the same is also true of micro-savings. Kiva could bring together small borrowers and small lenders. A major source of income for poor countries is their citizens living abroad and sending back remittances. Kiva could enable them to invest some of these savings as micro-loans.

• It might be possible for Kiva to widen its remit to include an inexpensive money-transfer system. (There might be regulatory issues with this however).

• The businesses that Kiva helps currently get a web journal. This could be enhanced to allow them to sell their goods and services over the Internet. (The feedback and money-transfer services will be useful here). Clearly this isn’t going to be useful for all small businesses in poor countries, but it will useful for some.

It’s widely held that mobile phones increase growth in poor countries. (See for example here, here, and here). Widespread Internet access, coupled with sites like Kiva, is likely to do the same, but more so.

I’ve just had an email from Matthew Flannery and they plan to roll out some of these enhancements next year.

[Link from A blog doesn’t need a clever name. Also posted on Cabalamat Journal]

  1. Caution taken, but I notice that a lot of the criticism of microlending amounts to that saying that it can’t solve all the world’s problems. If that’s the worst people can say about it, it must be a good idea!

    I don’t believe microlending can do everything, and nor does anyone else with sense. But I do believe it can do some things.

  2. There’s one piece of the Grameen equation that this new scheme doesn’t seem to have. Grameen, unlike the propaganda, does not in fact lend to people with no collateral. It makes the collateral peer pressure. People are orgqanised into groups and only a small subset of the group can have a loan at the same time, the others having to wait until the originals are repaid. There is thus great social pressure to repay the loans.

    What is Kiva using to supplant this?

    Or is it really going to end up as a way for rich people like us to toss $50 over the fence to the poor?

  3. Tim: Grameen […] makes the collateral peer pressure. […] What is Kiva using to supplant this?

    They’ve hinted that they will be rolling out some of the ideas I suggested. Whether this will involve some sort of reputation system, I don’t know. If you go to their website, you can ask them.

    Or is it really going to end up as a way for rich people like us to toss $50 over the fence to the poor?

    It’s starting out that way. Where it will end, I can’t tell.

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  5. Ojonimi Adegbe said:

    It is very clear that the best way to achieving wealth creation in developing countries is to support entrepreneurship. Kiva seems to be an excellent way, and it is a welcome development in Africa. I particularly look forward to supporting its objectives in Nigeria.