Kiva

For the past few months or so, I have been involved as a volunteer translator with Kiva, a San Francisco based company that provides a platform for people to make micro-loans to small business owners in developing country.

I first got aware of Kiva when watching PBS' coverage on the company and its borrowers and partners in Uganda. Actually in the past year Kiva has been gathering a lot of press coverage. Most recently, Nicolas Kristof from NY Times did a very nice op-ed , (and watch the video!), with a very descriptive title "You, Too, Can Be a Banker to the Poor."

I think Mr. Kristof's coverage nicely summarizes why I support Kiva. Growing up in indonesia, I learned that pure charity doesn't really work in most cases, as it often encouraged dependence and irresponsible spending. However, most of the businesses that Kiva targets are mostly ignored by banks. Well, in most developing countries, where securities markets are not so liquid, the traditional commercial bank is the main source of capital, so it can be choosy. If you one is not operating a cell phone network, oil refineries, power plant, millions of hectares of soy or oil palm, etc. the banks will probably not look at its loan proposal. The other alternatives that these small business owners use to have was individual loan broker that charges ridiculous interest and term. In Indonesia these people used to be nicknamed lintah darat or "land leech." This article (in indonesian) describes how a lintah darat uses thugs to collect loan and charges 20% interest for one month loan (that's like 240% a.p.r.). For you finance geeks, the one month Indonesian rupiah government bond annual yield ranges from 9-12% in the past 12 month, and consumer lending rates charged by banks were in the 16-20% range. So the lintah darats charges like 200% premium spread. However given that most of the micro-business owners are uneducated, they are unlikely to be able to even read and fill out a bank or government loan form.

With Kiva, individuals with Paypal account can lend these micro-business owners. Kiva lenders does not charge interest, however the local partners may charge interest to cover its operational expenses. Like banks, Kiva also makes the business owners accountable for the loan they receive. Over the course of the loan, the entrepreneurs are required to regularly update Kiva and their lenders with updates on their business through a journal. As you can see it's not as sophisticated as 10-Q's or 10-K filings, but at least it teaches accountability.

I was skeptical about the model at first. Considering that by western standards, the credit quality of these borrowers would be even beyond sub-prime by developed country standard, I expected very high default rate. So the first time I lent, I thought of it as charity. However, I was pleasantly surprised when I learned later that after over 30,000 lenders have contributed more than $2.5 million in loans, the default rate has been almost zero. Well, about 4% of the loans are behind schedule, but I still find the numbers really impressive.

I found that reading the journal can be touching at times. It is so satisfying that the $50 I lent to a small business owner 10,000 miles away is helping someone lift his or her living standard, and it cost me nothing (well the lost opportunity cost of earning interest which is insignificant).

So what are you waiting for? Start logging in to Kiva and instantly become a banker to the poor.