Matt Flannery and his colleagues see that lending can be person-to-person in a global society. They are returning to microfinance its human face, and building a citizen-based movement of micro-lenders as young as four years old.
The New Idea
For lenders of average means who wish to lend to small-scale entrepreneurs in developing economies, Matt and his co-founders saw two primary hurdles: one, the prevailing investment structure for microfinance institutions did not offer an entry point for lenders who wanted to loan small sums; and two, no existing platform enabled a spirit of person-to-person partnership and inspired personal connections and accountability.
Starting with the online lending platform he initially coded in 2005, Matt and his team are now creating a new way for lenders of average means – primarily those living in more developed economies – to loan to poor, small-scale entrepreneurs living in less well-developed parts of the world. The online experience feels real and direct: it establishes a connection through the stories of real people and through continuously updated information on recent transactions – new lenders joining, loans getting repaid, loan requests getting funded, and so forth. Through the site, lenders feel a collaborative spirit both with the entrepreneur and with other lenders who pay into a loan amount. The lending experience offers a first exposure to microfinance for many who visit the site, deepening awareness of global economic inequity, and of the shared opportunity to build an enabling environment for entrepreneurship.
Beyond transforming the lender experience, Matt and his team introduce new opportunities for the microfinance industry. First, they provide a new source of “patient,” affordable, risk-tolerant capital to those microfinance institutions (MFIs) that are solid and principled, but often too small to attract or absorb commercial-scale investment. Second, they introduce new standards of transparency that are enabling and not punitive, and that aim to reduce fraud and strengthen a culture among MFIs of transparency in accounting. And third, they have the potential to build an online credit history that can aid their borrowers in securing the trust of investors for future endeavors. This vote of credit-worthiness, and the reputational collateral it bestows, may offer a useful tool for people who are not formally “banked,” allowing the emergence of an online credit bureau for the world’s poor.
Begun in the 1970s, microlending now has an active portfolio of about $30 billion dollars and lends to about 150 million borrowers – most living in developing economies. Many investors see enormous growth potential and estimate that the market for microloans is in order of $250-$300 billion, or ten times the amount the lending mechanism currently delivers.As the industry figures out how to scale to meet demand, a debate has emerged that cuts to the core of what microfinance is meant to do and what principles might usefully guide it. Many emerging models are commercial, led by lending companies that earn interest rates of about 100%. New entrants are needed to lower transaction costs and drop interest rates, allowing money to deploy in ways that best meets the needs of poor people. Augmenting existing forms of capital with affordable capital is particularly important to fuel the emergence and growth of smaller start-up enterprises that are committed to providing low-interest loans.Philanthropic investment offers one possible stream of low-cost capital to MFIs but it has not been structured to allow direct loans from average lenders. For their part, would-be lenders are challenged to find philanthropic giving or investment opportunities that feel real, dynamic, and transparent. Direct lending to organizations exists, but misses the person-to-person connection. Donations to people exists – in the form of sponsor-a-child efforts – but fosters a vision of the developing world that is charity-dependent, not self-supporting. Furthermore, existing lending opportunities require people to trust in something they can’t see particularly well, and the feedback loops aren’t closed in ways that reassure lenders, particularly first-time lenders, or inspire them to be involved in change in a sustained way.And for their part, microfinance clients – small-scale entrepreneurs who borrow small sums to expand their businesses – are overlooked by commercial banks and so cannot build credit-worthiness through that channel. Some borrower entrepreneurs do not have a public record at all anywhere – online or on paper. Furthermore, they are typically cast as targets of charity rather than as entrepreneurs trying – as all entrepreneurs do – to surmount obstacles and build something that endures and benefits themselves, their families, and their societies.
Matt and his co-founders saw that the Internet could enable direct, transparent lending in a way that builds peer-to-peer connections and deepens empathy. To address the need they observed, they created an online platform, Kiva.org, that is simple, clear, and real-time, allowing lenders of average means to participate in the emerging movement of microfinance.Kiva aggregates small investments ($25) from lenders – most living in the developed economies of North America and Europe – and channels these investments at zero interest to over 100 “field partners” in 40 countries. These partners are organizations that have a track record of lending to the poor. The MFIs then on-lend the money at their normal interest rates to entrepreneurs who are profiled on the Kiva site. Taking into consideration the staff time for administration and loading content, Kiva’s capital costs less than 1 percent. Access to Kiva’s low-cost capital allows MFI partners to reinvest profits in the expansion of loans or services to small-scale business entrepreneurs, or lower the rate charged to the borrower.Loan officers at field partner institutions upload digital profiles – short biographies and a photograph – of the micro-entrepreneur borrowers. Each profile serves a few important functions: it informs the lender with facts about where the money is going. It also tells a story, establishing a personal connection and, in some measure, building empathy in the lender: he can imagine the life, opportunities, and challenges of this person half a planet away. This is not an experience of charity but of building together, fostering a person-to-person connection. And for the loan officer, the responsibility of profiling micro-entrepreneurs on a global platform expands her understanding of her role – from filling out numbers and forms, to telling a story, being a citizen journalist, and participating actively in an emerging global movement.The Kiva team sees that the trust that binds and fuels communities can be virtualized by supplying abundant and continuously refreshed information. The site's design as a content-rich, dynamic website allows lenders to see – day by day, week by week – what is happening with their small piece, and with the whole. The site visually applies the design feature of micro-credit that enables high repayment rates among borrowers – group accountability – to lenders, whose small profiles are visually “bundled” as supporters of a particular micro-entrepreneur. Lenders share the investment experience with other lenders from different backgrounds and places. Kiva is committed to advancing transparency in its lending. It offloads risk to lenders, being clear upfront that this is the approach. When a borrower defaults on repayment, which happens with less than 3 percent of Kiva loans, the lender takes the hit – the $25 loan she has committed to the responsible MFI is not returned for re-lending or withdrawal. The record of the loan default is not removed from the site, or in any other way swept aside. To improve practices among its MFI partners, Kiva engages auditors and a team of Kiva “Fellows,” volunteers who do spot-check audits of Kiva loans. Each Fellow visits fifteen borrowers each week, making sure that the loans reach the intended recipients, and capturing stories of borrowers’ changing lives. While Kiva has tracked its impact in terms of transactions and activity on the site, it is sparking offsite activity – and change – as well and is fueling self-organizing affinity groups and action-oriented clusters. Some coalesce around geography, with meet-up opportunities organized for in-area Kiva lenders. Groups of various sorts – e.g., schools and churches – have asked Kiva to build a curriculum to accompany the lending cycle for first time lenders. A large credit card company adopted Kiva as a way to involve their staff in an engaged way through lending. The Kiva team turns its needs into opportunities for participation for its lender and support base. For example, it has attracted a cadre of volunteers – over 300 – who translate the site’s non-English content into English each day, and will eventually translate content into non-English language groups to ensure broader global reach. Volunteer assignments are coordinated by a full-time paid volunteer coordinator.As Kiva moves forward, Matt and his colleagues hope to establish a middle ground between philanthropy and greed. They look forward to moving Kiva to a global platform that blurs the divide between people living in developed and developing economies. Matt also sees that some of the principles Kiva is using – disintermediation being a key one – may guide the evolution of banks of the future, and shape how lending institutions deploy investment tools to ease poverty.
Matt grew up in northwestern United States. His creative pattern evolved from technical beginnings – he taught himself how to program his Commodore 64 in the 1980s. Later, he began to experiment with media for telling stories. Video was one attractive medium – recently in reach of the amateur filmmaker with a small budget – and for a while, he and college friends produced short films and devised a small online distribution business.Following college, Matt visited his wife Jessica Jackley in East Africa, where she was working with a microfinance organization. From the experience of speaking to and filming micro-entrepreneurs and learning of their lives and needs, Matt and Jessica conceptualized and founded Kiva – in Swahali, “united” or “agreement." They tried out the start-up site on family and friends who, in only one weekend, funded seven entrepreneurs. Kiva was registered as a non-profit organization in 2005, and the organization’s development has been an iterative and collaborative exercise since then. In addition to guiding Kiva, Matt is a featured blogger on the Skoll Foundation's Social Edge, reaching readers with the message that everyone can participate in building a world of greater equity, with entrepreneurial opportunities for all.