Paradigm Shifted

Earlier this week, the first loan I made on Kiva was fully paid back. It was an 11 month loan, and I contributed $25. The recipient was a woman, Ana, in Mexico who needed funds to expand her food supply store. Ana lives in a village where the average interest rate on a loan is 100%.

For those not familiar with Kiva, the idea is simple: lenders make microloans to recipients through the microlending process. Kiva acts as “middleman” (though they don’t take a cut), bringing together the local microloan institutions and interested donors. Recipients are vetted through the local microlender, who is in turn vetted by Kiva. Details on the lending institutions can be found on the Kiva page, including average interest rates, default rates, loan size and length of terms.

Kiva consolidates this information and posts the loan options on their website. You as the lender can search through the options and find the loan that interests you the most, pledging $25 or more. When the loan is paid off, your money is returned.

How does Kiva differ from other types of peer-to-peer lending? In a few ways:

Kiva is nonprofit. They don’t make money on these loans; they are merely providing a vehicle by which lenders and loan recipients can be brought together in a financially efficient way.

Your return-on-investment is not monetary. You don’t make interest on the loan, but you do gain the satisfaction of knowing the “donation” is going to a good cause – a hardworking small business owner. You also have the knowledge of knowing exactly how the money is being spent.

The risk of default exists. Sometimes the business plan doesn’t work out. In that case, the loan recipient will default, and you will lose your “investment”. There are no collections agencies. That is why I think of it as more of a donation (with the possibility of a nice surprise at the end of a year or so).

Microlending is not without its problems, of course, but in terms of “charitable” contribution efforts, it can be a good compromise for those who worry about how their donations are being spent. In addition to the above, it is important to understand that microlending does not operate like traditional loans do. Loan recipients pay high interest rates (up to 30-40%) because they are very high risk loans. But without the microlending option, recipients are often forced to resort to local money sharks, who employ harsh methods to ensure repayment.

Ana’s lending agency was a Grameen affiliate in Chiapas that lends mostly to women. They have been on Kiva for 13 months, and currently have a 100% repayment rate (all Kiva partners experience a 2% default rate). Women have the most difficult time finding loans for a variety of reasons, but they are also the most likely to contribute meaningfully to community development. Thus, microloans to women have the benefit of not only aiding an individual, but her neighborhood and community as well.