Digital Verdure

"Poverty is not created by the poor. It is created by the structures of society and the policies pursued by society. Change the structure as we are doing in Bangladesh, and you will see that the poor change their own lives. Grameen's experience demonstrates that, given the support of financial capital, however small, the poor are fully capable of improving their lives." 

Muhammad Yunus, Banker to the Poor

Nor is microcredit small. In 2006, McKinsey & Co. reported that there was $17bn in outstanding microloans, and estimated that to be roughly 10% of the available market. Much of that money is controlled by the largest microfinance institutions, the so-called Tier 1 organizations like Grameen Bank, and distributed in small amounts, typically from $25 - $100, to vast networks of millions of borrowers in the developing world.

Lastly, microcredit is not ineffective. The personal impact stories of borrowers are tremendous.

“I never expected to be able to benefit from a loan, because I come from a very poor background. But thanks to [a microfinance organization], all the women of our group have received the same loan amount, which allows us to work with dignity and to earn our living honestly. The most important thing is the feeling of independence we have gained from this affair. We are all very happy.”

Mareme Seck, Senegal

Meanwhile, the repayment rates for microloans are extraordinarily high, often in excess of 99%.

However, many Americans, including those who give to international charities like Save the Children, don’t know about microcredit. The usual explanation for this is that Save the Children and it sponsorship model peers have appealed direct-to-donor via TV advertising (those old Sally Struthers commercials) and direct mail, whereas microfinance has operated mainly behind the scenes – able to collect capital from investment banks and provide a stable return. So-called “barefoot banking” is big business on Wall St.

Only the largest Tier 1 microfinance institutions have had the loan distribution networks and governance resources to tap into Wally St. Meanwhile smaller Tier 2 and 3 MFI’s have lacked the marketing budgets to appeal to individual lenders directly. That is changing rapidly thanks to Kiva.org

Kiva is an online peer-to-peer lending community that’s bringing together individual microcredit lenders, borrowers and Tier 2 and 3 MFI’s.  The non-profit startup has received a lot of media attention, including the adoration of Bill Clinton, who discussed the nonprofit in his book Giving and on Oprah.

I recently went on the site and found it well worth the hype. I liked it so much I ended up making 4 loans at $25 each – to a florist in Nicaragua, a farmer in Tajikistan, a taxi driver in an Armenian-disputed territory and a woman repairing her home in Cambodia.

And that is the beauty of Kiva, which means “unity” or “agreement” in Swahili. Through a variety of search filters on region, gender, economic sector and fundraising progress, I sought out borrowers that fulfilled my desire for a personal connection. My sister-in-law is from Nicaragua, my mother is a florist, my friend is studying in Tajikistan this summer, I’m half-Armenian and I liked like description of onsorm cakes the woman from Cambodia makes… “Onsorm is a kind of Cambodian cake that has rice, coconut with soybean and pork in the middle.”

More often lenders will "discover" borrowers according to cultural norms. As Kiva's Co-founder and CEO Matthew Flannery writes, “Lenders showed unambiguous preferences according to region, gender, and business type: Africans first, women first, and agriculture first. A female African fruit seller? Funded in hours. Nicaraguan retail stand? Funded in days. A Bulgarian Taxi Driver? Funded in weeks.”

Whether searching with intent or discovering, Kiva nails the best practices of social networking, combining multi-attribute search and discovery tools with data-rich profiles, stories and of course photos. As my favorite web 2.0 guru Dave McClure likes to say, “The Faces! The FACES! It’s ALL About the FACES!”

The effect of is two-fold. The photos and stories entice the visitor to participate, while the data transparency assures them it’s safe.  Flannery writes in his product philosophy, “Lending is connecting. At Kiva.org, lending money is all about information exchange. In a sense, money is a type of information. Lending to someone else creates an ongoing communication between two individuals that is more binding than a donation.”

On Facebook, you friend. On Twitter, you follow. And on Kiva, you lend.

What’s cool too is that I can also see who else gave to this borrower (or “entrepreneur” in Kiva parlance), so we can share in the lending experience. I can join Lending Teams like “Kiva Christians” and “Team Obama.” Not only does this reinforce my sense of community, it serves to validate my trust in Kiva and the individual borrower – if these other lenders took the plunge, why not me?

Of course, this would all roll up very nicely in a Facebook App, which is in development.

Kiva is another example of the web making the world small and flat – enabling users to get extraordinarily granular in borrower criteria and do an end-run around the larger institutions that would previously intermediate the lending experience.

I made my 4 loans last week and already two are in repayment. And this tidbit of knowledge encapsulates yet another key feature: organizational transparency.

Sites like Charity Navigator, a kind of Morning Star for charities, have put pressure on organizations like Save the Children to be more transparent. Today, I can visit Save the Children and learn exactly how much of every dollar donated goes toward beneficiaries versus overhead.

Kiva is taking it a step further. The site continuously updates a full body of organizational data in near real-time, including loan fundraising/repayment status and risk statistics.

Kiva warns of three types of lender risk: entrepreneur, field partner and country. Each type comes with its own special hazards. Entrepreneurs might get sick and a war or natural disaster might hit a country.

But Kiva excels at managing field partner risk by aggregating and publishing data on field partners – typically Tier 2 and 3 MFIs – which traditionally have been excluded from capital markets. In this way, Kiva enables lenders to perform due diligence and creates market intelligence on the invisible smaller MFI segments.

As Flannery says, “we are giving organizations the ability to prove themselves through performance in a similar fashion to how Ebay allowed lesser known individuals and businesses to become major e-commerce players through credibility scores.”

How does Kiva do all this? Originally it was conceived as a for-profit startup, but when Flannery and his co-founder discovered the SEC and regulatory hoops they would have to jump through in order to charge interest on loans, they switched to a non-profit model. Kiva still collects revenue on the float (or interest accumulated while the loans sit in a bank account waiting for dispersal) and with an appeal at the end of the lending process. This revenue is non-taxable and goes right back into the organization (instead of paying out investors).

Kiva’s most direct competitor is MicroPlace.com, a for-profit which offers interest-bearing loans via a variety of MFI's, but does not feature lender/borrower social networking. MicroPlace is owned by eBay, which provided the financial and legal resources to navigate the SEC and regulatory process. In a way, MicroPlace does not compete with Kiva, because it focuses on investment performance instead of social networking.

Flannery still wants to add interest to Kiva loans and evolve the borrower/lender relationship from charitable to financial. More capital will flow to borrowers in the developing world if there is a return available. Also, there’s the opportunity to evolve our understanding of poverty and “the poor” (as if that were a permanent state of being).

Kiva recently introduced lending to small entrepreneurial businesses in the US. Encouraged by Maria Shriver, this is a bold risk to the Kiva brand that I think they are brave but right to try. A theme of the Kiva experience thus far has been connecting visitors with far-away borrowers. Now a Kiva lender might donate to an entrepreneur down the street.

This brings Kiva into direct competition with Prosper.com, a younger but already larger for-profit online P2P lending network that is in an "official" quite period while its regulatory status is under review.