Our Kiva review touches upon the world of peer to peer lending and showcases an interesting community called Kiva.org. This is microlending with a global reach! For more examples of social lending, you can also check out this Lending Club review.
Online person to person lending has become one of those activities that’s picking up interest, especially during this era of tighter credit. Typically, it’s become a form of alternative investment for some investors (lenders) as well, though not all lending networks support this goal.
I’m familiar with Lending Club and Prosper, but one such social lending site that I hadn’t investigated till recently is Kiva.org, which focuses on matters of international business and finance; it’s a non-profit organization that helps you make micro loans to small businesses in third world countries.
Kiva: Micro Lending With A Global Reach
In Swahili, the word “kiva” means “agreement” or “unity”. Lenders choose a business and make a loan by using a credit card online at the Kiva website. Kiva then transfers the loan proceeds to local partners, who distribute the loans to the businesses. Over time, the local partner collects repayments and offers business updates through Kiva. Ultimately, your loan is repaid and you can withdraw the money or lend it to another business. The purpose of Kiva is to connect you with needy third world businesses looking for loans.
How Does Kiva Work? Can You Make Money With Kiva?
I like the idea behind Kiva, which is to help people establish businesses so they can pull themselves up from poverty. Loans are extended in units of $25. When money is repaid on the loan, it is deposited into your Kiva account (which can be connected to a PayPal account). You can choose to withdraw the repaid money or lend it again. But no interest is paid on Kiva loans to the lender, so this is not the place you’d expect to make money as a lender.
So as far as Kiva’s premise goes — beyond it being a noble idea — you may wonder how such loans may be beneficial for you.
The Benefits Of Lending At Kiva
1. Kiva can help you achieve an international presence.
Small businesses join Kiva for the benefit of creating an international presence. As a lender, you can lend to third world businesses in similar industries to extend your global reach. You can also make your business more friendly to international clients by showing your participation in Kiva on your website and company promotional items.
2. Kiva provides a platform for educational research.
As a teacher, administrator, corporate leader or researcher, you may want to learn more about how the international business climate works. Kiva provides an avenue for this kind of learning and is an outstanding educational tool in the classroom or boardroom to show how businesses lend money, grow and expand globally.
3. Kiva loans help grease the wheels of the worldwide economy.
The worldwide economic climate has a rippling effect on every country. We hear a lot about initiatives to support small businesses and free trade across borders, but now here’s one way for us to directly make a difference in the global arena. We can actually put our money where it matters by lending to third world businesses. Through Kiva, instead of just talking about making global change, we’ve got the power in our hands to actually instigate changes, even with modest amounts of money to invest.
Kiva In The Media
I’ve read that Kiva has had great coverage in the media lately — they were featured on The Oprah Winfrey Show last year, on CNBC’s Business Nation, the Today Show and BBC. They’ve been growing in terms of loan volume and staff over the last year as well, and landed the honor of being on the TIME list, “50 Best Websites in 2008”. So it seems that they’re gaining a lot of traction in the microlending space.
The Risks of Micro Lending At Kiva
Factually speaking, the default rate for the $19,050,735 loans made through Kiva is 2.8 percent. It seems to be at par with risk assessments of other peer to peer lending networks like Lending Club (although it has been reported recently that for Lending Club’s highest quality loans, the default rate has been ZERO). But like any other social lending site, it has its risks — and to me, it seems like lending through Kiva would entail far more risk than with other sites like Lending Club and Prosper, since lending is done at the international level, and business in other parts of the world is conducted differently than in the United States. Some notes on this matter:
- There’s the risk of dealing with entrepreneurs you don’t know directly. You’d have to trust the Kiva Field Partners who are responsible for screening business owners for health issues as well as for the viability of their businesses. There is accountability through the Field Partners.
- Kiva Field Partners are assigned risk ratings from 1 to 5, with 5 as low risk. Bankruptcy, fraud and operational errors are some of the factors affecting ratings.
- Other countries are subject to macro risks: the country’s politics, economy, natural environment and infrastructure can influence the progress of small businesses you’re funding.
The Bottom Line
You’d have to determine whether you can accept the risks of lending your money to overseas interests and decide whether you’d like to put your money to use in this way. If you choose a Field Partner with a risk rating of 5 and a business with few macro economic constraints, you’ve got a good chance of avoiding defaults. Lending through Kiva should be thought of as an altruistic endeavor, and as a way to deploy your money for the good of others, and not for profit. In the literal sense, it’s definitely one way to share the wealth, as they say!