Before joining Kiva, Premal Shah worked at the online payment company PayPal, which was bought by eBay in 2002. There, Shah developed a number of projects aimed at tackling global poverty by connecting people through technology. In 1997, while studying at Stanford University, Shah received a grant from the university to research microfinance in Gujarat, India. In this interview with FRONTLINE/World reporter Clark Boyd, Shah explains the concept behind Kiva and how it differs from other microfinance models. He also talks about the founding of the company, its mission, and how the microfinance industry as a whole is helping to lift people in the developing world out of poverty.
Q: Clark Boyd: How did Kiva get started?
A: Premel Shah: When we launched in October 2005, it was one guy, Matt [Flannery], who worked at Tivo, and he just kind of put the idea out to his family and friends and the blogosphere, and soon we got picked up by some major blogs -- like the Daily Kos, for example. And, next thing you know, all the small businesses on the site were immediately sponsored. That's when we realized, "Wow, this is actually pretty interesting." We started with a microfinance institute (MFI) in Uganda, but we thought, "What if we contacted other MFIs?" And so we started getting more and more of them to list businesses on the site. And, as they list them, they get funded within 2.2 days on average, so we've started raising more and more money each month and getting more and more Internet users who actually visit the site to loan money. It's really been spreading.
Q:What's the mission behind the company?
A:First, you have to understand the background of microfinance: There are 2 billion people today who live on less than $2 a day. There's a quote on Kiva's site that says, "I'd love to teach a man to fish." In other words, if you give a man a fish, it solves the problem for one day, but if you teach a man to fish, it solves the problem for a lifetime. What we argue at Kiva is that most of the working poor today actually know how to fish. They just need a little seed capital to buy a boat and a net. With that, they could actually start earning income for their families. And then they could start paying for their children's education, paying for their own health expenditures and basically just creating a sustainable livelihood for themselves. So, it's access to credit that's important.
Q:Microfinance has been around for a while, but could you briefly explain the concept?
A:It's been around for about 30 years. And almost 100 million working poor have received access to microfinance -- for example, small, affordable loans to start a business or grow a business. If you are poor, one of the problems is walking into a bank. Let's say you're a member of the working poor in India. The bank would say, "You know, we're not going to give you a loan." And the reason is that you have no collateral; you have no credit history; you may be illiterate. And so you might have a really great small business, but it's very hard to get access to credit from the "formal sector." In its wake, a bunch of informal sources of credit came into play -- most notably, the village money lender, who, because there was really no competition, could charge anywhere from 80 percent to almost 800 percent (it ranges by country), but these are exorbitant rates. That's what people call the "poverty penalty," which means that the poor tend to pay more for just about everything because they can't get access to the formal market.
Q:So how did this change the industry?
A:These nongovernmental organizations and microfinance institutions have really come into play; they've loaned quite a bit of money and have seen extraordinary payment rates. And the repayment rates are driven by the fact that they typically lend to groups of women who live in the same neighborhood, and they say: "If you all pay back, we'll give you another loan in the future at a low interest rate. But if there's a default, then your eligibility to get a loan as a group basically goes away." So there's a lot of peer monitoring and a lot of "reputational collateral" that keeps the repayment rates very high in microfinancing. Ninety-five percent is the industry average.
Q:How large is the industry today?
A:There are about 3,300 microfinance institutions around the world. Most of these are really small, so their biggest constraint to growth is getting access to capital from a bank and so forth. It's estimated today that about 500 million working poor need access to low-cost capital from these microfinance institutions. But only about 100 million of them have been reached over the last 30 years. That's a lot. Last year, 2005, was declared the year of microcredit by the United Nations. And there's a lot of interest from development economists and world leaders about extending more capital to the poor through these microfinance institutions.
Q:So where do you come in?
A:We thought that if we could connect the MFIs with more capital, and more affordable capital, they could actually expand their operations quicker and reach more of the poor in their community.
Q:What sort of finance institutions are we talking about?
A:It's a very broad range. Some might be as small as a church group... a church group in Uganda, say. The pastor has been seeing his congregation for the last 20 years and knows that three or four people in his congregation have small businesses, and if the church had a little capital to lend out to these small businesses and get paid back over time, and those funds are loaned to a few other folks in the congregation, then it will benefit the whole congregation. And, because the individuals are in one congregation and they know each other, peer monitoring usually ensures high repayment rates.
Q:What about the other end of the spectrum?
A:A larger example would be the Grameen Bank in Bangledesh [started and supported by the working poor of Bangladesh] that has become a real bank. Not only do they provide loans but they actually collect deposits. They do microinsurance. They do remittances. Grameen Bank is now in half the villages of Bangladesh.
What's interesting is that the World Bank did a survey of 191 microfinance institutions all over the world, and they asked these microfinance practitioners the following questions: What's your greatest restraint to growth? Is it lack of helpful government regulation? Is it lack of enough borrowers in your area? Is it lack of capacity to serve them? Is it lack of funding?
And the top answer was lack of funding, with the biggest restraint being that they didn't have enough contact with social investors.
Q:So Kiva basically allows people to make loans, usually in the range of $25 to $150, to individuals in the developing world featured on your Web site. Over time, usually around 12 months, those who have loaned money are paid back in full and can reinvest the loan and also track the progress of how their loan is being used through journal updates on the site. The loan people don't receive any interest on their loan. You aggregate the money donated online and send it to your microfinance partners in the field. And PayPal offers the actual online transaction service to Kiva free of charge.
That's basically it, yes. But the question we are often asked is, "What are the interest rates being charged to the borrowers in the field by the local microfinance institutes?" The answer is startling to a lot of people because the borrower pays 37 percent on average. This seems really high, especially to people in the United States. But the alternative to paying 37 percent is for these borrowers, these entrepreneurs, to go to the informal credit markets -- the village money lender, for example -- who are charging anywhere from 80 percent to about 800 percent. Rates vary across countries, but it's significantly more expensive.
Q:What does this 37 percent the local microfinance institutions are charging go toward?
A:The biggest cost is the administrative expense. In rural Africa, to go out and visit these borrowers in the field takes time and money because they're so geographically dispersed. Also, because the loans are very small, the percentage needed just to service a loan is relatively large -- maybe as much as $20 over the course of a year for a loan of $100. The other big expense is the cost of funds. This is what the MFIs are paying to their local bank to get capital to lend to the poor in smaller chunks. On average, the banks are charging them about 10 percent. So, on that $100 loan, they've already lost $10 just paying the interest on the money they have borrowed.
Q:How does Kiva plan to improve the cost of borrowing?
A:The idea is that if we can drive the cost of the loan down from 10 percent on average to 0 percent or 2 percent, we're going to create more spread for these MFIs to invest in their own kind of organizations, increase staff, reach more of the working poor. Ultimately, once they saturate their markets and reach most of the poor and provide competition to the village money lender, they can start lowering the interest rate they charge. Also, loans can force transparency and accountability, which donations may not. That's the economics behind Kiva right now.
Q:How does Kiva survive and make money if it's offering 0 percent interest to the microfinance institutes?
A:There are two things going on here. The first is that humans are fundamentally better than banks. Today, average people with an Internet connection and a credit card cannot actually invest in small businesses in the developing world. By creating Kiva, we're tapping into this new source of capital, which is ordinary individuals. These are people who value an emotional return, not just a financial one. Banks don't value emotional returns. And so banks will charge a high rate to these MFIs, while people will generally be more forgiving. Secondly, banks have a cost structure. They need to pay for their brand, brick-and-mortar expenses, and employees. On the other hand, there's really no cost for an Internet surfer who's sipping coffee to come in and lend $100 to a small business. And so by aggregating all of these $25 or $100 Internet lenders around the world, we can actually raise a huge amount with 0 percent interest or low interest debt capital for these MFIs.
Q:But if you aren't charging any interest anywhere, how does Kiva stay in business?
A:Today we're not charging any interest. And so all of the money that we get basically goes straight to the MFIs. But while these institutes are paying on average 10 percent to local banks for money, we're trying to source it for less through the Internet and individuals. We think that there'll be some spread in there -- maybe 1 or 2 percent -- where we could actually start charging interest ourselves to make us a self-sustainable nonprofit institution.
Q:And you can do that as a nonprofit?
A:You can be a 501c3 IRS-approved nonprofit, which we are. But then you can also create some revenue streams so that you don't always have to go to donors for money. You can actually sustain yourself over time.
Q:And that 1 to 2 percent interest would be to cover your costs.
A:Exactly. And if we ever have any surplus, we reinvest that in the business. In this case, we would do it in the form of lowering the interest rate for the MFI or actually increasing the interest rate for the lenders if they wanted to earn a higher return. But, we believe that it really doesn't take that much money to run a small online platform, because it's just a Web site, and all you need to run it are a few engineers and a few key staff members.
Q:Aren't you worried that a higher interest rate could become a slippery slope, and you would have to keep charging more and more?
A:We're hoping that the total volume on the site grows so that we can keep rates fixed. More and more Americans and Europeans are coming to the Internet, or coming to Kiva.org, and making loans of larger amounts.
Today we may only raise $800,000 from 10,000 individuals, but how will this look in five years, when maybe there will be millions of individuals visiting Kiva.org -- picking different businesses from the developing world and seeing this as part of a new asset class that they want to put some of their money into. If we can take a small management fee of 1 percent of that and keep the organization very light and streamlined, we believe we can be self-sustainable without always raising our rates.
Q:Everything you've outlined here just strikes me as impossible without the Internet.
A:Yes. What would have taken an army of people and flights to many different countries only a few years ago, we are enabling through a Web site and a small group of people in an office in San Francisco. And just as on eBay, the MFIs around the world who post businesses will be vetted on the bases of reputation and performance scores by lenders who use the site to make sure that people are lending to good businesses working with good MFIs.
Q:Can you give us a sense of how much it costs to run Kiva right now?
A:Yeah, sure. To run Kiva today -- and we're nearly a year in -- we've raised about $125,000 dollars from individuals here in Silicon Valley, mainly people who are really supportive of the mission and this kind of innovative model of using the Internet to connect people through loans. But what's exciting is that, spending $75,000 to run the site so far, we've raised about $400,000 in loans. And you could argue that for just about every $1 that you put into operating an online platform, we're raising $4 from people in Kansas and Wisconsin and New York who would not have done anything in microfinance or actually invested any money. The big variable cost for Kiva was the payment processing fees, which PayPal basically has donated to us.
Q:What if PayPal pulls the plug?
A:Well, if PayPal pulls the plug, that would severely hurt the model, and then we would have to charge higher interest rates to our MFIs. But I think PayPal really values this, because this is a way to use their product to connect people and serve the poor. And, you know, they couldn't be more thrilled to be a partner. I mean, it doesn't really cost them; for them, it's such a small amount of money.
Q:Can you keep getting people to fund things when they know they are not going to get anything but what they originally put in?
A:In our first year we are offering no interest. And that's really because we think that most people want to make a difference, and they don't value getting interest back. But we have heard from some lenders that it would be interesting if they could see no financial difference between this and their money-market account. And in truth, there's a lot more money in the investment capital pool than in the donation capital pool. Ideally, in the long term, you'd be able to get a financial return as well as an emotional return.
This interview between Clark Boyd and Premal Shah took place at Kiva's offices in San Francisco on September 17, 2006. It has been edited for clarity.