Kiva: A Microcredit Post-Mortem

In 2006 I dipped my toes into the world of microfinance with two investments: one in Kiva, a non-profit that specializes in the developing world, and Prosper, which lends to U.S. borrowers. My last Kiva loan was just repaid so I can tabulate the final results.

In microfinance, a lender provides a small loan to a borrower who can't get credit from traditional banks. Grameen Bank, a Nobel Peace Prize-winning microfinance organization, lent small sums to rural entrepreneurs, most of them women, in Bangladesh. The community spirit helped these businesses thrive and Grameen's annual income is now in the tens of millions of dollars.

Kiva takes the spirit of microfinance and adds the ease of Internet shopping. After funding my account with PayPal and reading a few borrower profiles, I invested small amounts — as little as $25 — into shares of loans to be paid back up to 12 months later. Although the borrowers paid interest to the creditors who made the loans, I didn't receive any of that as income. My first few loans were repaid quickly so I loaned the funds again to new entrepreneurs. Many times Kiva was so flooded with lenders that I had no outlets to lend any money.

In total I supported 68 borrowers in Azerbaijan, Bolivia, Cambodia, Cameroon, the Dominican Republic, Ecuador, El Salvador, Ghana, Guatemala, Indonesia, Iraq, Kenya, Mexico, Mozambique, Nigeria, Paraguay, Peru, Samoa, Sierra Leone, Tajikistan, Tanzania, Togo, Uganda, Ukraine, and Vietnam. Of these loans only 6 ended in default, including two in Kenya during a time of major political crisis. I invested $1,000 cash and funded $3,375 of loan shares. My loss of $131 in capital represented only 3.9% of the total loan amount, more than double the Kiva average of 1.84% but well below the default rate I experienced on Prosper, a site which lends to US-only borrowers. I lost 13.1% of my cash to defaults but that's still a better performance than if I had invested in the S&P 500, which lost 16.3% of its value in that same time frame.

Overall I was impressed with the principle of microfinance but I think it works best when a community is involved from end to end. With only a brief profile to connect me via Kiva and an intermediary finance organization to the borrower, I felt like I didn't know enough about the loans I was funding. Some borrowers are in states like Iraq, Kenya, and Lebanon where political unrest is a major concern, making me wonder where my money would really go.

In the time since I started lending with Kiva and Prosper, I established a Charitable Gift Fund with Fidelity Investments. I donate to this gift fund and Fidelity invests it in stocks for me. I can then take this money which may have appreciated in value and grant it to charities both local and global. Overall I think that the core idea of microfinance is sound: invest in local communities and everyone will benefit. I plan to continue my investment efforts in vehicles where I don't need to see my money coming back to me directly, but rather in an improvement in my surroundings.