Kiva — Where Crowdsourcing Meets Alt-Lending

When Kiva got its start a decade ago, the needs of small businesses in developed nations like the U.S. were not its original area of interest. Cofounded by two Stanford MBAs, the alternative lender came into existence when its two founders realized that there was a major problem in lending to businesses in the developing world, namely that the capital was far too expensive.

And that businesses in those worlds were very, very small.

Upon reviewing data from a microlender in Uganda, it became apparent that microlenders were borrowing from banks at a cripplingly high rate, often 12 percent plus fees and charges — costs that were then passed back to the borrowers. The outcome was that these first-time entrepreneurs were paying interest rates in the 35 percent range to access capital.

And so, Kiva set about building a better alternative: a lending platform with a new model. One that cut out the bank entirely and connected developing world borrowers with (mostly) first-world lenders willing to float the comparatively small (less than $100) sums to get those businesses off the ground. Those loans, unlike those offered on other P2P lending sites like Lending Club, are not exactly a form of investment; Kiva’s loans are all interest-free.

Lenders actually ponied up the money because they wanted to make a direct investment in helping a small business get off the ground. Kiva lenders get their original investment back once repaid; they just don’t make any more than their original investment (and assume the risk of default).

Which wasn’t a huge risk since the typical loan is $25. And Kiva delivered a lot of them — $788 million worth of them, $25 at a time.

But to Kiva President Premal Shah and the team at Kiva, something became staggeringly clear to them as they worked longer in the microlending space: It wasn’t only entrepreneurs in the developing world that were lacking access to reasonably priced lending.

“When we really looked at the stats in the U.S., the numbers were just staggering — something like 70 percent of SMBs are denied for loans. That is a denial rate in the neighborhood of 80,000 per day,” Shah noted.

And so, the team at Kiva started retooling its project to work for an American audience, and the recently released Kiva Zip is the outcome of those efforts.

A Very Different Path For P2P Loans

Conceptually, Kiva Zip functions like something of a cross between Kickstarter and Lending Club. The nonprofit specializes in relatively small ($10,000 or less) loans for borrowers that might otherwise have difficulty accessing capital, either from a bank lender or from one of the more credit score-dependent P2P platforms.

When a business owner wants to secure a loan through Kiva, the first step is to sign in and create a profile on the platform that gives a short explanation of the project and what exactly the funds will go toward.

From there is the element that sets Kiva apart. Instead of evaluating potential borrowers on the strength of a credit score, borrowers are essentially judged by the quality of their social networks — and not the digital type, rather the networks of people with whom the potential borrower actually interacts regularly.

“After creating that profile, the next step for securing Kiva funds is to recruit around 20 people to contribute at least $25 dollars each. Once those 20 people have been recruited, borrowers can tap into our network of over a million lenders to finance their project.”

Kiva got its official U.S. launch a few weeks ago, with a splashy introduction to the marketplace by former President Bill Clinton, but has been in testing phase in U.S. cities, including New York, Philadelphia and San Francisco.

“It’s been in beta for some time,” says Shah. “Now that we have nailed this social underwriting concept, we’re ready to go prime time, and we’d like any small business that has trouble accessing capital to become aware of it.”

Shah has further noted that Kiva has actually reached out to platforms like Lending Club to encourage them to “send us your rejects.”

A Different Customer Base

So far, in beta, Kiva has made 1,845 loans in the United States and lent out about $10 million. The repayment rate is high, hovering around 90 percent — an almost stunning accomplishment considering that Kiva does not “price” its loans for risk, rather all of its loans carry no interest.

And, Shar noted, so far, Kiva is serving a somewhat different type of consumer than what is usually served by traditional SMB lending. Of those served in the U.S. so far, 65 percent have been ethnic minorities, and 55 percent have been women. Over 40 percent have been in business for less than a year (making them ineligible for a wide swath of loans) and are centered in neighborhoods that banks have historically had low levels of enthusiasm about lending in.

And the projects are a bit different. One woman running an alternative school in New York raised funds to hire a teacher without having to raise tuition; another sought dollars to invest in a chocolate fountain for a restaurant. What holds the business together, Shah noted, is its place in the community it serves.

“We are looking at mainstreet places, where the value provided is massive but hard to capture in traditional underwriting paperwork. We are working to make sure that value gets exposed.”

Because communities have interests in business development that are different from banks, Shah notes, at base, Kiva presents everyday investors with an opportunity to do something that hasn’t been possible in the past: invest hyperlocally.

“You’ve heard of ‘buy local.’ Why isn’t there a ‘lend local?’ I would like that to be the new normal,” Shah noted.