This interview will be featured as a two part series with audio clips and full transcripts.
Part One: Rising to the Challenge
Shortcuts:
In the Beginning… (read transcript) (listen)
Kiva’s Challenges (read transcript) (listen)
Premal’s Inspiration (read transcript) (listen)
Kiva’s Business Model (read transcript) (listen)
Defining Success at the Entrepreneur Level (read transcript) (listen)
Who lends? (read transcript) (listen)
Bearing the Risk (read transcript) (listen)
Average Loan Size (read transcript) (listen)
Generation X, Y & Z (read transcript) (listen)
Outreach Strategy (read transcript) (listen)
NB: How did Kiva start?
MF: Kiva did start off in a very personal way. Literally, Jessica (Flannery) and I knew every business person on the website for the first month because she worked in the village in Uganda where we were working. And that created lots of great stories.
For instance, one of our lenders lent to a woman who was a fishmonger in Tororo, Uganda and the two way communication that is available on the website resulted in the lender buying the fishmonger’s daughter a wheelchair because she had some problem with her legs and couldn’t walk.
So it’s really a situation where this loan that occurs, it’s sticky. When you loan someone money, you are waiting to get paid back. So it’s a sustained connection, and it can create more of a connection than donating. Great things can happen when people connect, so we are really excited about that.
Going forward, we believe that facilitating connections is going to be our “bread and butter” so we are trying to create software, a platform which will continuously create those synergies without us getting much involved. We don’t want to create the connection or manage the connections, we want to facilitate them and then get out of the way.
So, you can kind of equate this to a virtual bulletin board in the community that has something that is extremely familiar to them (photos of themselves and their friends) in a relatively new tool (the computer). I think that beyond the cross border connections, perhaps there are secondary things that Kiva is just beginning to learn about itself. It’s almost become a MySpace or Facebook in that local community, because of the lack of anything else that exists like that, so it’s just neat to see it unfold.
NB: What are the organization’s greatest challenges?
MF: A few months ago, the answer would have been “partners.” We only had one partner at the time and needed to find really great partners to work with. Currently, that is going pretty well. We have 9 partners and it’s become sort of a “steamroller effect”; we are getting more and more people, so that’s great.
But, obviously, our biggest challenge is catching up to what we have created. We went from my and Jessica’s project to something pretty substantial and legitimate. So to briefly answer your question, it is infrastructure; building the infrastructure of our organization to handle what we see out there as a huge demand and a huge audience.
KVL: From my perspective, Kiva has done a great job of bringing in partners and a supply of borrowers. But it caught fire, as I mentioned in the blogosphere, and we started getting a lot of print attention and all these people started coming to the site and looking for entrepreneurs to give loans to but couldn’t find them at times.
Now we have a sufficient supply of borrowers for the time being and we need to step up the visibility a little bit more. Also, we now want to make sure that our messaging is correct and updated, because it started out as a kind of “Matt and Jessica’s project” but is now a legitimate organization with some really high level folks on board and we are ready to go to the next level. So I need to figure out, with the help from these guys how to do that in terms of press visibility.
NB: Who (or what organizations) inspire/s you?
PS: OK, I get really excited about a lot of the collaborative web 2.0 companies where the content is really coming from the general populace. I think of beautiful social experiments like Wikipedia that have come to light. I think of open source projects like Mozilla. And I think of Ebay and how they have created a self regulating platform that allows two complete strangers to trade with each other in a trusted environment. So, from a company standpoint there a lot of great companies that have really innovated building trust over the internet and letting people connect.
And one of my favorite things I hear Matt say is that we are connecting people over loans. But the loan is sometimes secondary in some ways and the primary thing is the real connection about what it is like to be, for example, a goat herder in Uganda. The focus isn’t necessarily on the desolate poverty aspect of that situation, so much as the entrepreneurial bond, something that anyone can empathize with. So that to me is what Kiva can bring and I think that we can follow the innovation of other companies that are out there.
Finally, a little over a year ago, I attended the WRI Base of the Economic Pyramid Conference in San Francisco and met a ton of social entrepreneurs and folks in the development and microfinance industry. These are the folks who helped Kiva grow, in the first 6 months, from 1 country to 10 countries, by just relying on that trusted network, a committed band of people who are working and connected over the internet. Its just amazing having folks, like the folks I met at the WRI Conference, helping to expand our bottlenecks and understand our challenges, so those are important connections for me as well.
NB: How does Kiva make a profit?
MF: Right now we are not making money, except for offline donations. So, just like any start up, we need funding to pick up. So, we are raising money and have raised funds from individuals and private angel donors.
Going forward, we are looking at ways that we can become self sustaining. I think it is non negotiable for us that we need to have a self sustainable business to survive, especially in microfinance, in the spirit of the whole industry. So the way that we are looking at raising our own funds (profits essentially even though we are a non profit) is through optional transaction fees. Kiva processes transactions from lenders to borrowers, and we are looking at the possibility of charging optional transaction fees to subsidize those transactions. So, you can imagine that someday when you are loaning, there will be a question like, “Do you want to pay a 5 percent fee to Kiva to process this transaction?”
Another potential income stream is through investing the funds that we are managing. Kiva gets loan capital and then offers loans to partners, and gets the repaid loans and then keeps them in its account until the lenders withdraw that capital. So, in the process, we are building a fund that is growing, that we can manage, and then also make money off of the investment.
We are also looking at the possibility of charging subscription fees to our partners to use the software. So, for the MFIs that work with us, especially the for-profit ones, we are looking at the possibility of charging them a yearly fee, just to use our software and post businesses on the website. All of those things are possibilities, but you know we are carefully looking at which is the best one and slowly moving forward.
MF: Well, we are trying to create a pretty open platform, where the partners can blog about the businesses and post a lot of data if they want. And we love it when our partners post rich content that says, “This goat herder bought 5 goats for $10 each and sold them for $15 each and was able to pay the school fees for his family,” but that is the type of impact assessment that just bubbles up to our site; we don’t necessarily do that ourselves - it just bubbles up to our site.
KVL: We like to keep it really authentic, which is the main reason for encouraging our partners to post what they want. I think that people really appreciate that.
NB: Who is Kiva’s target lender?
PS: Well, I think Kiva’s role in the world and its primary focus is to give the non accredited “Average Joe” an opportunity to invest. And because pay pal is accepted in 55 countries, not just the U.S., we have actually seen a huge amount of interest from other parts of the world, particularly Europe.
Our core business is to always allow someone to make as little as a $25 investment and to give people an outlet to participate in a very different form of connecting with someone else. So, that is what we will stay focused on.
I think there are opportunities for Pierre Omidyar, and other high net worth individuals, to make direct investments in microfinance. Our goal is to drive as much capital as possible, so a bulk loan that would allow someone to maybe invest in 50 businesses at once at $25 each is something that Kiva could launch. But actually wining and dining high net worth individuals, that is probably not part of Kiva’s plan. There are other groups that do that well. We really want to engage the average person who wants to make low financial commitments to microfinance.
NB: Who bears the risk of the loan?
PS: Well, I think the original intention was to let the lender accept the default risk and that is still our policy and what the MFI signs up for. I think the reality is that it remains to be seen. We haven’t had a default on the site yet, but it is still too early to tell with our repayments. What I think we may find is delinquency—at what point does the MFI write it off as a loss and stop the collections efforts? What I am trying to say is that at the end of 12 months (if the loan term is 12 months) if not all of the principal has been repaid, typically what MFIs do is they go into this collections process and start using their loan loss reserves. Probably 90 - 180 days from that point they actually write off the loss. Our preference is that the lender bears the cost of the loss and not eat up the MFI’s loan loss reserve. Here, the MFI would repay at least partial funding to the lender, because it’s a much more real experience. But, I think that all remains to be seen how we define that policy when this actually happens.
MF: I will summarize what you just said. Kiva started with this very peer to peer idea for lending whereby if a client in a developing country does not pay back a loan the lender does not receive the loan. I was very interested in really financially connecting the client with the lender. The lender in America or Europe with the goat herder in Africa, so if the goat herder failed the lender didn’t get repaid. If the goat herder succeeded, the lender got repaid. That is the initial vision for Kiva. I think we might expand in the near future to offering other products on our website that are guaranteed, but we haven’t done that yet and today the policy is just what I described.
NB: What is Kiva’s average loan size?
MF: We divide the loans up into what we call “shares”--$25 shares--so a $500 loan has 20 shares. Individuals online can purchase those and essentially what they are doing is buying a portion of the loan. We find that the typical lender buys 4 shares per transaction.
NB: In a previous blog posting on WorldChanging, users suggested that Kiva’s lending base may reach a younger demographic than the average investor because of the online nature of the transaction. Has this been true for Kiva?
MF: Well, I think our demographic started mostly from people that read blogs. And I do think that they are younger and more internet savvy, obviously because of the nature of our business. It’s mostly blog readers and socially conscious blog readers. People that read NextBillion, people that read Daily Kos—these big mega blogs about social activism—they are really popular with our users.
NB: How has the demographic driven your outreach strategy?
KVL: I absolutely think blogs have been our “bread and butter” and they are the whole reason that Kiva has taken off, especially blogs like NextBillion and Daily Kos. They really attract the type of lender that Kiva appeals to, and so our outreach has been very much grassroots from that level. It’s been really amazing for me personally. I’ve been doing PR for 15 years and I have never seen anything take off like this.
PS: Yeah, I think any kind of proactive outreach that we do would be to further the grassroots support of Kiva. I don’t think that Kiva is the type of company that would take out a Superbowl ad, so much as making it easier for folks who are already on the internet to share the idea with others, whether it is through affiliate programs or emails that are rich in content.
Part Two: The Future of Microfinance, Strategic Partnerships & Value Proposition
Shortcuts:
Defining Kiva’s Role (read transcript) (listen)
“Steamrolling” the Partner Process (read transcript) (listen)
What We Are Looking for in a Partner (read transcript) (listen)
MFI Interest Rates (read transcript) (listen)
Just the Facts: Kiva’s Business Case (read transcript) (listen)
Connecting Entrepreneurs and New Technology (read transcript) (listen)
Additional Services to Partners (read transcript) (listen)
Kiva as a Model (read transcript) (listen)
Other Peer to Peer Investment Groups (read transcript) (listen)
Creating “An Open Platform” (read transcript) (listen)
NB: How do you weigh in on the current microfinance debates? And what is Kiva’s role in the greater micro credit community?
MF: I just want to contribute to the field. I want every MFI that works with Kiva to come out in a better place than where they started, whether it’s an NGO, a development organization or an actual bank. If they work with Kiva I want to help them own it. I hope that the money we provide furthers them along the path to being self sustainable and that is my personal view on where the industry is going for microfinance.
PS: What is the role of subsidization? There are 10,000 MFIs. Should there be industry Darwinism or should more MFIs proliferate because only 10% of the world’s poor have access to financial services? There are these raging debates between practitioners and pundits and my experience through Kiva (and prior to Kiva) has been to try and understand the things that Kiva does that are indisputably good and I think that there are a couple of them.
One example is how Kiva captures a previously untapped source of capital. There is a guy in Kansas right now who probably A) never heard of micro credit or B) read a Newsweek article, has no other option but to make a donation at this point at a price that he would like to. So, he could go and find Grameen.org and make a donation, but my sense is that compared to all the other donations that this person might make, he probably wouldn’t get around to doing it.
So the thing that I think is indisputably good about Kiva is that it is such a unique idea and it’s so different from the typical thing you can do with your money. Because it’s highly transparent, it’s highly personal, and you are doing something good with very little financial commitment. It’s unlocking previously trapped capital for the microfinance industry. And because there is an emotional return that complements it, it subsidizes the need for a financial return, but it’s still operating at the market rate and translates into more affordable capital for a lot of the high quality MFIs that we wish to work with. To the extent that these MFIs use those savings in a productive way to expand capacity, I think it advances the mission.
On a specific controversy, what is the impact of microfinance on poverty alleviation? The great thing about Kiva is that when we get rich updates, especially the last ones about what really happened with your money and what this entrepreneur is doing and how she/he may or may not be better off, when you get that real data, you bring it to light and make it transparent for folks. So, I think time will tell and I think Kiva’s platform will be an easy way for researchers to validate microfinance or point out where its limitations are, because we are asking for real updates on each client.
NB: What is Kiva’s due diligence process when choosing partners?
MF: We have a pretty extensive selection process for choosing partners to work with and it averages about 3 months from when we make initial contact with a partner to the point where their businesses are live on our website. So, at the time that NextBillion and other blogs wrote about Kiva, we had one partner and I was working another job. And then, we realized that Kiva was a potentially really exciting idea. So I quit my job and Premal started working with us, and a few of us in Silicon Valley spent a lot of time figuring out how to expand.
In that process we started a partnership program. We have a full time staff member who works on partnerships, and we brought our second partner on in February. What our partnership coordinator did was to select MFI and development organizations that had an extensive network of references that we checked: legal documents that verified their existence, a reputation to uphold and that they could get on the internet quite frequently and post to our website, because a lot of microfinance institutions are in rural places that can’t access the internet all the time.
PS: Just to add to what Matt is saying, where we are today is that we started with one country in October and we are about to launch our 10th country (May 2006) and in addition to the reference and network checks, we look at the financials—particular attention is paid to the loan loss reserves, the default and loss rates for the business, and the average loan size. We found that the average loan size for the businesses posted on Kiva is around the $500 mark, which really makes it a cost effective option in terms of the cost of capital that Kiva can provide. So there are a few metrics that we look at as well just to make sure that it would be a good fit for the platform.
NB: What do you look for in a potential partner?
PS: Well, this is something that we are defining as we go along. I think we are committed to helping MFIs access capital to a point where they take the savings and reinvest it in expanded capacity and reach more of the population. And we would love for these MFIs to grow their capacity to the point where these operations could be self sustaining. So, I think our position is to be an open platform. But when we do our partner selection, we look for MFIs that have a commitment to be self sustaining in their markets and use that spread they get with the lower cost of capital that Kiva can provide to actually expand their capacity. So, it’s much more of an exception basis going forward, as we are now operating in 10 countries, to find the little mom and pop start up MFI. We would much prefer to work with say a Tier II MFI that is on the verge of being profitable, if they are available.
NB: What accounts for the variance in the interest rates of your MFI partners?
PS: It’s a number of things. One, it’s the kind of market that they are in, the cost of capital for their operations, and their administrative costs. Some of our partners have orientated themselves to be for-profit institutions; some are still subsidized by grant funding. So you know, when we ask the MFIs who are charging on the higher end of things, they often point to other MFIs and say, “Well those guys are subsidized and they are not running a long term sustainable operation. We are running to be self sustaining and therefore we are charging a higher interest rate that the market still allows for, which is still cheaper than alternative sources of capital, but it allows us to keep our lights on or expand profitably.” So I think that is kind of the driver or in some sense management orientation that we work with. Some MFIs have just graduated to the level where they have walked away from subsidization to try to run a for-profit enterprise, or a least a self sustaining profitable enterprise, and I think that is driving the interest rate higher.
MF: Let me just add a few things: there is also the risk of inflation and currency fluctuation.
NB: Return on Capital: What is the business case for Kiva?
PS: So, we are trying to understand, what is Kiva’s real cost of capital? We have heard that the microfinance industry cost of capital is around 12 percent. So, MFIs receive a bulk loan from a commercial bank and they pay roughly 12 percent for that debt.
Kiva offers the microfinance institution or partner 0 percent cost of capital, but that is only the financial cost. One of the big questions is, what is the total cost when you layer in the administrative costs (the administrative costs for a staff member to post up a business and maybe blog about it)? We have some early data from our first case study in South America, based on samples from about 80 businesses. In this study it looks as if the administrative cost of capital is about 2 percent, so the total cost of capital from Kiva is about 2 percent, where again the industry average is 12 percent. So, it seems that there are real economic reasons to participate even when administrative costs are factored in and it’s good to have real data, as opposed to something on a powerpoint presentation that might suggest it.
What is great now, as Matt mentioned earlier, is that we are beginning to “steamroll” on the partnership side. Because there are other people who have already done it, we are no longer defining what we think the benefits are or whether we think that this concept will work. We are able to refer back to previous partners’ experiences. For example, one of our newest partners, World Relief (a microfinance organization that works in war-torn areas) is in Cambodia with a local MFI (Credit). The MFI’s interest in it (maybe as opposed to our first partners’ interest which may have included a PR reason) is purely spreadsheet reasons. They know, “Wow, the cost of capital if we post with Kiva is actually a pretty small percentage of the loan size, if you factor in the administrative costs.” So it is really helping us to have a fact-based explanation to what Kiva is doing when we go to other partners. It will allow us to grow our partnership base faster.
NB: What is Kiva’s role in the deployment of appropriate technology for new ventures?
PS: I think if you break out the potential partner set into two worlds, one is an existing set of MFIs where we are sourcing much lower cost capital than their current cost of capital and we can be of value to these. One is in the area of professional services / management advice and the second is by being a channel for the Kickstarts of the world to provide resources. Something like, “Hey, have you considered this appropriate technology?” or “Maybe some of your clients would be interested in this?” and “Maybe this is a new source of revenue?” I think that Kiva’s role could just act as a distribution channel for other ventures that are trying to do things around income generation in these communities. I think that is a really interesting idea. Right now, in the next 3 months, as we build the organization, it’s probably not something that we do. And, if we do, we would probably start with a pilot, Kickstart being an interesting example, since they are here in the Bay Area.
NB: How do lenders engage with the entrepreneur?
PS: We allow the lender community to post comments to the business. Then, the loan officer, who is actually posting blog updates, ensures that the business receives those comments and there is a two way connection. I personally haven’t seen people provide business advice, so much as supportive comments or questions about the postings that have been written like, “When you say that this goes for 1800 Ugandan shillings what did you mean?” So, I think that there is a “seeking to understand” mentality from our lender community when they are posting comments.
I think there is a second thing that we haven’t really defined yet at Kiva that could become an interesting part of Kiva’s future in the longer term, which is Kiva could be providing real professional services to our MFI partners. So, in addition to lower cost capital where the spread or the savings from that can be reinvested in capacity expansion, what if Kiva could be a channel for MFI consultants? Or create our own professional services? I mean, this is way out there, but the idea is to help actually deploy the savings or help the MFI, so it’s kind of in addition to the low cost capital; it’s actually expertise to help the MFI scale its operations. Kiva would love to be a partner like that in the longer term with our MFIs and provide that kind of value to them.
NB: Are there other applications using the Kiva model?
MF: Definitely off the cuff, Kiva’s mission is connecting people through lending for the sake of alleviating poverty, so we are willing to work with any business or partner (as long as they are very reputable) that is in the business of alleviating poverty whether that is for-profit or non-profit, it is not a big difference for us. We are not tied to microfinance, and if there are bigger businesses that want to be on our site one day, we would be interested. We have already done a $2,000 loan on our site, we have done trust banks of 20 women all pooled in one loan, and we have helped start an agricultural ranch that is pretty large, so we are interested in starting businesses through our site that exist to alleviate poverty.
NB: Are there other institutions that use similar P2P lending principals?
MF: There are two: Zopa (UK) and Prosper (US) which are great companies and are engaging people in lending in their own respective countries on a for-profit basis. They are not necessarily focused on alleviating poverty, but Kiva sees themselves very much in the mold of those two companies, being that we are peer to peer. Unlike them, we are international and we are driven primarily by a social mission, although they both consider themselves socially beneficial as well.
NB: Do they create a return on investment for their investors?
MF: They both have a return on investment; they both offer interest rates. And, when I started Kiva, just as an aside, I was trying to offer interest rates. I was actually getting the interest at first and not passing it on, but I stopped that. Now there is no interest that we get from our partners, but we are trying to offer interest to our lenders. There is no philosophical decision not to do so; the only reason that we haven’t done that is because of regulatory concerns, which we hope to overcome later this year, so that we can offer a profit for our lenders.
PS: I think the greatest misconceptions about Kiva are when we are working internally underneath the hood here in the office, we think, “How do we create this open platform?” So, a lender should come and be able to make an informed choice and they should be able to understand the microfinance partners and information about them as well. But in addition to understanding that, they should understand the blogging frequency, which our MFI partners should be able to set (maybe it’s very frequent, or if they want to keep their administrative costs low, maybe it’s very infrequent). They should one day be able to earn a non-zero interest rate and finally they should be able to understand the risk of their loan. And those variables go into what a lender would have to weigh when selecting from one business on the site to another.
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