Kiva

A. How did you find this company? What are the main facts about its activities?

KIVA is an online platform that enables any person in the world with excess financial capital, as little as $25, to support an entrepreneurial or general activity in developing and remote regions of the world. The borrowers are usually too poor to be able to receive a credit from traditional banking institutions, especially because they have nothing to offer as collateral. KIVA’s main service is to provide Micro Finance Institutions (MFI’s) all over the world with financial capital. Through the KIVA platform, every person with little excess cash is a potential lender to the system, so that the pool of lenders is unimaginably large, compared to the situation before KIVA was launched. Because KIVA is a non-for-profit organization that does not demand any interest from the borrowers or the MFI’s, KIVA reduces the ultimate cost for the borrower and makes the micro finance lending process more efficient. KIVA especially tries to reach and cover all regions in the world, even the most remote places on earth, so that everybody that is in need of little cash to start up a business can be supported. The MFI’s, or field partners, are elected according to their respective ethical value in turn. KIVA not only just offers the financial service, but also tries to keep up social performance, which led KIVA to partner up with special field partners that specialize in extremely poor regions of the world, family support, entrepreneurial activity or extremely marginalized groups, etc. Thus, besides circumventing high interest rates, highly bureaucratic processes that were the case before KIVA because capital to the MFI’s in the world used to be provided by institutional banks and other private or public establishments, and facilitating the lending process, KIVA also manages to direct capital flows to where it is needed. Furthermore, KIVA also offers language courses and other basic educational classes through its wide net of volunteers, which today already amount up to approximately 450. One other special feature of the platform, is that each lender can seek out a person that he would like to lend money to and find out about his/her needs and idea and even look at pictures, which reinforces social bonding between lender and borrower. Moreover, the lender can exactly track where his/her money goes and can check on the repayment schedule whenever he/she wants to. So far, the overall repayment rate of loans made through KIVA is nearly 100%. Another important fact is that KIVA actually assumes that lenders repeat the lending cycle over and over again, instead of withdrawing their credit. This assumption has so far to be turned out true.

B. What are the Ethical challenges this company is addressing?

The main ethical challenge KIVA addresses is to alleviate poverty. KIVA’s intention is to help low-income individuals to lift themselves out of poverty by providing them with access to financial services. In general, poor people rarely used to have access to services from the formal financial sector. Traditional financial institutions are designed to help those who already have financial assets. There are several reasons for banks to shy away from the underprivileged: irregular income patterns, inadequate credit information, lack of collateral, high transaction costs due to small sized loans, psychological and cultural barriers. KIVA’s intention is to mitigate this market failure of credit under provision. According to the Consultative Group to Assist the Poor (CGAP), microfinance has helped the poor to meet basic human needs, protect against every-day risks and to take advantage of economic opportunities. It is also often argued that microfinance also leads to better living conditions, since for example parents can make greater investments in their children’s education or pay for health services when they are needed. With more than 80% of KIVA’s borrowers being women, the company also encourages the empowerment of women and their economic participation thereby fostering gender-equity.
With the mission to connect people, KIVA is a non-profit organization and does not charge interest to its field partners and does not provide interest to its lenders. Interest rates are determined by the field partner and used to cover the field partner’s operating expenses. To return costs of providing the loans, interest rates tend to be rather high. Nevertheless, to clients the microfinance services are typically so valuable, that they are willing to pay these high interest rates on loans.
KIVA.org is a highly transparent, data-rich lending platform. The idea is very powerful, however, it has its limitations as well.

C. What makes this company really inspiring to you and why would you trust it?

The answer to this question is based on three pillars: information and operation of the company, experience of a third party and own experience.
We believe that KIVA is a really ethical company because it is a non-for profit company. It redistributes money without taking any charge. All expenses KIVA has during the operation are paid by donations or governmental support and not with the lenders investment or interest rates charged for taking the credit. Further, all operations are highly transparent. The lender has almost full information where the investment is going to and what the status of the repayments is. It is for us ethical and at the same time creates trust that KIVA has a rating system for it is field partners, which contributes to transparency as well. This rating system secures the ethical behavior not only for KIVA itself but rather through the entire lending process form the private lender to the receiver of the credit. In KIVA’s terms this engagement is called social performance.
The initial base for trusting this company was created when we read an article in one of German´s biggest newspapers (Die Zeit, 2011) called "Mein gutes Geld" (my precious money) by Reiner Luyken. He wanted to contribute to a change in the situation of third world countries but was not sure how because he had not heard bad news about the microfinance industry and spending money in general. He came across KIVA and tried to study this microfinance business as a private scientific research project. He chose a lender contributed $250 to the credit and followed his money´s way to the receiver. In total he flew three times to Sierra Leone to get updates about the progress of his investment, the lenders personal condition and the financing environment. In the end he was surprised by the economic capabilities of the people over there, surprised of the personal development of the lender, which became more confident and stronger as a human being, but finally there where also a few remarks on the pressure the people are exposed to if they cannot repay the credit.
Lastly, one of our group members decided after reading this inspiring article to engage in the lending process as well. An account was created, a receiver was chosen and $25 was lent. The company’s website is set up in a simple fashion that makes it easy to follow the entire process of getting updates and communicating with other lenders for the same project. This high level of transparency, the initial idea of not charging money of any party to cover expenses as a non-for-profit organization, the initial idea of helping people in need in a way that they basically can help themselves (develop economically and personally) and the successful lending/ repaying process of one of our members makes us confident to say that the company is really ethical and we have a lot of trust in it.

D.What are the possible challenges facing the company in the future and how do you think this company may improve?

There can be several challenges which could influence the business model of KIVA. KIVA needs to ensure the control of their field partners and have to watch the interest rates which they are raising in every country. Interest rates of course are allowed to differ (e.g. an interest rate of 25% in a country with an inflation rate of 18% bails down to a real interest rate of 7%, which is acceptable) but they need to be monitored every time.

In addition, next to the monitoring, KIVA needs to ensure the transparency of the cash flows between private lenders, the MFIs and the borrowers. In the past already critiques arose that the transparency of the cash flows is not exactly given and that KIVA tried to push people to spend money with their story telling (posting pictures of people, telling their story and therewith encourage people to lend more or more often). KIVA has to encourage continuing to work as a transparent non-profit organization which does not want something else but being an opportunity provider for the people who may need it.

One way to improve would be to expand the business in different areas. This could mean that KIVA will not only try to help people in businesses but supports education or provides first aid in crisis situations. There are many ways of helping people in developing countries and KIVA CEO and Co-Founder Matt Flannery also wrote on a blog reply: “I can imagine that one day KIVA will highlight savings and education on our site. At this early stage, we haven’t been able to create the functionality to enable that. Getting lending right has been quite challenging, as you can imagine.” In our opinion, KIVA should ensure that the lending business continues as it and in the future, additional services are added without losing the focus on the lending activities.