What will a self-sustainable Kiva look like?

[Guest]

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[AccountAbility]

I am finally getting into Muhammad Yunus’ most recent book, “Creating a World Without Poverty”, subtitled Social Business and the Future of Capitalism.  In this book he advocates a new form of enterprise to fill a real gap in available structures.  He labels these  “social businesses”.  He points out the weaknesses of the structural choices available to such an enterprise as Kiva.  While I think the non-profit choice was the best available to Kiva, Yunus points out the weakness of this structural choice to adequately address the goals intended.

He proposes a hybrid entity where capital infusions from investors are used primarily to meet a social good. Profits are used to grow more efficient in delivering that social good or even to expand into new areas of social good and return original capital to investors.  That hardly encompasses the scope of his discussion, but perhaps states the essence to explain where I am coming from.

What will it take to make Kiva self sustaining and when that is achieved what will it look like?  One of Kiva’s stated goals is to come alongside emerging MFIs and assist them to become self-sustaining.  But what about Kiva itself?

Right now, as I understand it, Kiva is kept afloat by three things.  First, Lenders (sometimes) add a donation to Kiva when they lend.  Second, Kiva  receives grants from some large foundations to provide the growth of infrastructure.  Third, Kiva makes interest on float as monies pass through between MFIs and lenders.  There are ancillary additions, such as the Kiva store, but unless I am missing something, that’s how it covers its expenses.

Is Kiva a charity that will always depend on donations to cover its shortfall, or is it one of these “social businesses” that ought to be self sufficient after a time?  It does seem strange to think about giving interest to lenders so long as Kiva is simultaneously asking for donations– at least from the same group. 

But maybe individual lenders are really two groups.  The first group are lenders, plain and simple.  The second group are closer to investors in a social business.  They strongly desire to “invest” by donations and also (either/or or both/and) invest by leaving any interest they might have made on the loan behind as an investment in Kiva.   Maybe the first group as lenders should be getting some  interest.  The second group as investors in a social business should be treated as shareholders, with the buy-in and solid communication that such entails.

Its not important what these groups are called.  If “investor” freaks people out because it reminds them too much of what’s wrong with the capitalistic system, other terms can be used.  Yunus has no problem with the word in the context of his “Social Business”.

I think many on Kiva Friends are closer to the second group.  Has anyone had thoughts along similar lines?

Dan

[RichardF]

Hi Dan,

Interesting topic.  I'm just thinking out loud here...

How is Kiva conceptually any different than an MFI in terms of sustainability?  They both offer a financial service and they have to cover expenses at a sustainable level.  Ultimately, I believe a social business has to shift the responsibility for viability from its benefactors to its beneficiaries.  In this case, I believe Kiva's primary direct beneficiaries (customers) are the MFI's.  Kiva needs to find a way to become sustainable from the service fees it charges MFIs, plus whatever investment income it has from sources like contributions, float and endowments.  In the long run, endowments might be able to subsidize a good chunk of the expenses they would have to charge to these MFIs, still making the cost of money to MFIs and their customers (the entrepreneurs) very attractive.

[Canadian Here]

Dan:
I prefer to think of my "investment" as one in human capital, rather than in a business. 
Lorna

[AccountAbility]

Thanks for your thoughts, Richard.  Yes, the MFIs are part of the equation and definitely need to be factored in. 

Perhaps Kiva needs to set the "normal" fees or interest rates for getting Kiva monies, and then use another mechanism to subsidize these costs for emerging MFIs, either through contributions or otherwise.

An interest rate would parallel other money sources for the MFIs, but the Kiva concept is a bundle of services and requirements, much like a franchise, so a fee would reward those MFIs who took the most advantage of Kiva monies.

Would the MFIs make up part of the investor group, i.e. the shareholders?

Dan

[Ulli]

I agree with Richard, that Kiva will have to charge some fees or interest in order to become self-sustainable.
Reading the information for the field partners on the Kiva website, I got the impression that the 0% interest that Kiva advertises is like a plea to get Kiva into the game of microfinance. Once Kiva has become an established partner in the microfinance world, it might be able to charge 1 or 2% interest in order to become independent of donations.
As for helping emerging MFIs; I don't think this is longer an issue since the requirements for field partners listed on the kiva website do not really allow for brand-new MFIs.

In order to become a Field Partner with Kiva, a microfinance institution must, at a minimum:

    * Serve at least 1,000 active borrowers with microfinance services
    * Have a history (at least 2-3 years) of lending to poor, excluded, and/or vulnerable people for the purpose of alleviating poverty or reducing vulnerability
    * Be registered as a legal entity in its country of operation
    * Have at least 1 year of financial audits
    * We also prefer an MFI have a profile on the MIX Market )

[cpbailey]

Ulli,

Looks like Kiva is playing with the Big Boys now!

Colette

[RichardF]

Hi all,

For some reason, the topics here on Unitus on Poverty & Microfinance never went anywhere.  The president and CEO of Unitus, Geoff Davis, still is on Kiva's Board of Directors. Unitus has a very interesting strategy to help eliminate global poverty through "Social Venture Capitalism" :

OUR STRATEGY: Social Venture Capitalism In summary, there are four phases of the Unitus Acceleration Model:  -   Selecting and partnering with the world’s highest-potential emerging MFIs -   Structuring investments that enable our MFI partners to create sustainable capital foundations -   Providing capacity-building consulting services to remove our MFI partners’ growth constraints, helping them become for-profit banks for the poor -   Exiting partnerships after our MFI partners achieve scale and have the capacity and financing to support their continued growth

I would assume Kiva has some sort of shared strategy with Unitus, such that Unitus helps build MFIs (which also are more than just lenders, of course) then moves on to the next one, and Kiva plays the role of the ongoing source of low cost money.  It still seems to me that the basic strategy for building Kiva to sustainability would be very similar.  The functional difference being that Kiva would become a for-profit money source for MFIs.

[Ulli]

Looks like Kiva is playing with the Big Boys now!

Yes, I agree. I believe for exactly this reason the introduction of the BRAC MFI partners was a big step for Kiva.

[AccountAbility]

Since Kiva is already a nonprofit, perhaps the way forward is to begin setting up for-profit subsidiaries which provide the various services that further the goal. Whether they are called Social Businesses (ala Yunus) or not, the goal would be to provide services which allow local MFIs to tap into the power of the internet and its ability to reach a large pool of lender monies at relatively low cost.

When referring to emerging MFIs, I don't think we are talking about new or tiny MFIs as much as we are talking about MFIs who have their act together but have not yet reached self-sustainability.  Matt referred to these as being in "the long tail".

Dan

[RichardF]

Since Kiva is already a nonprofit, perhaps the way forward is to begin setting up for-profit subsidiaries which provide the various services that further the goal.

"Just recently, Kiva formed an LLC subsidiary. A "for-profit", if you will. Let's let that sit in. Ahh."
- Matt Flannery (http://www.socialedge.org/blogs/kiva-chronicles/archive/2008/03/01/escheat-me) 

p.s. I cross-posted some thoughts about this at Marley's topic, Kiva needs input re: unused credit.

[AccountAbility]

We think of the MFIs as the main Kiva beneficiaries.  IF this is so, then we need to focus on the MFIs for ways to gain self sustainability.

One of the unanswered questions for me is whether Kiva monies are economical to the MFIs on a net basis.  We as lenders regularly toot the horn of this "free" money, but the requirements from Kiva have a cost.  It costs them to write up each loan with pictures, reporting on individual loan repayments, posting journals, being subjected to audits and spot reviews by Kiva and its representatives and so forth.

Can Kiva deliver efficient ways to comply with all this and also charge either interest or a fee to the MFI for use of the "free" money?  Or is one of the reasons that it has been hard to sign up MFIs due to the costs being perceived as equal or outweighing the benefits?

Dan

[Dottie b]

I suspect Premal could tell us the answer to that.

Dottie B

[dh]

Premal indicated (Silicon Valley Microfinance Network Sept 2007) that the cost to the MFI for posting and maintaining client profiles for Kiva was 0.2-2% depending, among other things, on the size of the loan. Roughly 1.3% was offset by the lenders absorbing loan losses, for a net cost of 0-1%. "For most MFIs, Kiva represents the cheapest U.S. dollar debt capital source available." (These figures do not consider currency risk or hedging costs.)

[AccountAbility]

Thanks for reminding me of that presentation.  I wonder how that scales since some of Kiva's requirements are essentially fixed costs while others are variable?  For the smaller, emerging MFIs (smaller in terms of Kiva portfolios) that seems a bit low.

Dan

[Dagfinn]

I have just read the blog on social edge about the 40% of funds not being put to use.  I was of the impression that if I let my Kiva credit stay unused and used fresh money Kiva itself got the interest accrued- am totally mistaken?

Dagfinn A.

[cpbailey]

Dagfinn,

You are correct that Kiva does get interest on the unused Kiva credit.  They put it at the overnight rate, which presumably is low.  They must be able to transfer this to the rightful owner upon request, so there is no locking the funds for rolling 6 month terms.  I would encourage you to loan the credits for a couple reasons.  First, you must pay to convert to dollars from Euros.  Secondly, it is a currency risk to just leave the funds in dollars.  Lately, your dollars are worth less and less if you were to convert them.  Finally, it is just easier to relend!  You can always add more if you see a lot of loans you MUST have.

Unless you feel the dollar is about to surge in value...   

Colette

[wind5001]

In a way, Colette, that is what I am doing right now: I have feeble resources (which I must have mentionned countless times by now!), but the $ is so weak, I only pay about 16 euros for the $25. I invest money now, because later, when the $ resurges, I might be thinking about withdrawing some of the resources invested now...well, and maybe I am not. But then I can still be happy that I invested in Kiva when it was comparably cheap for me...

[RichardF]

This is my reply to Ronan's suggestion to have Kiva's main revenue stream come from advertising on the site.

In a nutshell, Ronan suggested Kiva model its site after Facebook or LinkedIn to generate revenue from advertising, and then listed a number of benefits to that approach.  First off, I'll say Kiva generating some form of revenue stream from Internet advertising is a great concept!    Of course, exactly how that might get implemented is the rub.

When I read Ronan's suggestion, another style of nonprofit/for profit arrangement came to mind - the Wikimedia Foundation, Wikipedia and Wikia.  Essentially all the brainchild of one brain, these three organizations weave a tangled web, but simplistically and loosely can be thought of for this suggestion as an overarching parent foundation, a nonprofit arm and a for profit arm.

When I went to a Wikia site I've highlighted elsewhere to find an example of the style of advertising they use, this is what I found!



Now, I'm not saying Kiva should get MicroPlace as an advertiser, but hey, don't some interesting possibilities come to mind?! 

To get a little closer back to the point, here's an approach that seems to have some long-term potential to me.  The parent organization, Kiva Microfunds, runs the show and operates the nonprofit, zero interest and advertising-free "Kiva.org".  It develops another spin-off or simply uses the one it already has for managing its overnight float account to operate "KivaToo.com"!  KivaToo accepts advertising and regularly sends checks back home to help support the more asthetically-minded family members.  And this for-profit sibling looks into the possibility of setting up some sort of broker/dealer arrangement with selected partners to offer modest levels of income to lenders, while still offering below market rates for loans to its partners.  One way to help offset other costs to these partners might be to eliminate journal requirements and simplify listings.

[AccountAbility]

This is my reply to Ronan's suggestion to have Kiva's main revenue stream come from advertising on the site.

One way to help offset other costs to these partners might be to eliminate journal requirements and simplify listings.

Of course, some MFI Field Partners are already availing themselves of the cost savings of journal elimination. 

Dan

[JonC]

I'd love to read Mr Yunus' book. MFIs can be very profitable which why I proposed that KIVA look into taking a stake in the MFI's it partners with or at least some of them. I see that as a sustainable approach, as far as development of microfinace is concerned. I dont think that KIVA and similar organizations should look to stay exclusivley in microfinace. I MUST read the book but it seems to me that Mr Yunus could be refering to mechanisms of social investing other microfiannce. If that is indeed the case, then that's tremendously exciting! The main goal for me should be to create assets which will foster development for years to come.