Andrew Hoffman’s Blog

I first heard of Kiva in 2006 when Muhammad Yunus won the Nobel Peace Prize for pioneering micro-lending to the poor. Although I thought micro-lending through Kiva was a great concept when I first heard of it, I simply put Kiva to the back of my mind and never actually made any loans through the site. It wasn’t until my rather unsatisfying experience with for-profit lending in the United States that I began to consider lending with Kiva. I decided to contribute $500 in loans to assist entrepreneurs and small-business owners in the developing world because I think these micro-finance loans, in the aggregate, truly have the potential to help improve the quality of life in the developing world and to reduce poverty abroad.

For those who are unfamiliar, Kiva is a U.S.-based nonprofit organization that helps to make available micro-finance loans in the developing world in amounts ranging from several hundred to several thousand dollars. Lenders offer their money interest-free to Kiva, which sets a $25 minimum increment for each loan made. The money from multiple lenders is pooled and then distributed to entrepreneurs who pay interest on the loans, albeit at a drastically lower rate than would otherwise be available to them from local lenders. Although interest rates of 26%, for example, might seem usurious to U.S. citizens, consider that the only available alternative to some of these entrepreneurs are loans at the rate of 80-120% APY.

I think these Kiva loans have the potential to improve the quality of life of the recipients of the loans. These loans reward hard work and an entrepreneurial spirit; there’s no sense of entitlement to these funds amongst the loan applicant. As far as I can tell, the loan recipients use the money they receive to help build their small businesses. These loans aren’t a handout; they need to be repaid on a schedule. These loans allow for the creation of wealth, which in the aggregate, will help to pull people in these developing countries out of poverty. It’s a concept that I can–and now do–support.

One aspect of Kiva that really intrigues me is the low default rate on the loans. As of June 10, 2009, the default rate for Kiva is listed at only 1.65% with a delinquency rate of 5.06%! As I understand it, this means that for every $1,000 of loans made, on average, only $16.50 ultimately will be uncollectable.

Compare that low default rate to one of my for-profit ventures, writing unsecured loans on Prosper.com to individuals in the United States. I think the results really say a lot about the level of financial responsibility of entrepreneurs in the developing world, versus loan seekers in the United States (note: not all of my loans on Prosper were for entrepreneurial purposes, so a direct comparison isn’t possible). On Prosper, I contributed about $50 to 54 separate loans at an average interest rate of 14.29%. Fifteen loans defaulted, and two more are currently involved in pending bankruptcy proceedings–I expect these to be discharged, as well. That puts my default rate at 31.48%, nineteen times higher than the default rate on Kiva loans in the developing world! I’ll be lucky if I break even!

Thus, I decided to write $500 worth of loans with Kiva, re-loaning the repaid funds to other entrepreneurs. So far, I have made twenty $25 loans to entrepreneurs around the globe. The average loan term of my loans is about 10 months, so I should receive around $50 back each month, assuming there are no delinquencies or defaults (probably wishful thinking). Thus, I could fund an additional two loans each month and assist a total of 24 entrepreneurs in the developing world each year.

I encourage everyone to sign up for Kiva and contribute $25 to at least one loan to an entrepreneur in the developing world. Given their low default rate, chances seem pretty good that you’ll get your money back. You can view the loans that I’ve funded here.