If you’ve been reading our blog series then you know that microfinance is a term that describes the practice of giving small loans to entrepreneurs in developing countries that would not otherwise be able to get a loan. This seems great, but some say that these loans are unfair because of their high interest rates they charge. There are companies that specialize in this and make a lot of money because of the extreme interest rates, however Kiva is different.
Kiva is a non-profit microfinance organization that’s mission to ‘connect people, through lending, for the sake of alleviating poverty’. Kiva allows anyone to log onto their website, and choose a borrower that they want to lend to based on their online profile. The Kiva loaning process is simple. First they partner with an existing microfinance firm which they call field partners. These field partners are experienced with the areas and the people who will be receiving the loans. The field partners find the people who need the loans and upload their needs and bios to an online profile. Then people like you and me browse the profiles and select who to loan to, and then pay the amount online. Kiva then gives the funds to the field partners who then distribute it to the borrowers. After the borrowers have started their business and made a profit they will pay back their loan plus the interest rate and the lenders will be repaid. Still a little confused about the process? Check out this simple video below to see a possible Kiva loan scenario!
It is great that Kiva can provide these loans but still, the borrowers are charged a very high interest rate. So how is this fair? Well, while Kiva is a non-profit, it still has to pay the field partners and cover the expenses of coordinating the loans. While the amounts of the loans are generally very small, the transaction cost to process them remains the same as if it were a much larger loan. This is what causes the transaction costs to be much higher proportionally which leads to the large interest rates. These interest rates are a large downside, however, the borrowers would be unable to get the money from anywhere else and it can lead to major life improvements.
With its lenders from around the world, Kiva has been able to provide over $100 million in microfinance loans to entrepreneurs in developing countries. Kiva has even caught celebrity attention and has received support from Bill Clinton and Maroon 5 along with many others. If you would like more information about how Kiva works, visit kiva.org!