I wanted to have a financial index that represented the Kiva "lending" model better than those I was used to seeing in typical investment summaries. For example, the Return on Investment (ROI) is something like
ROI = ((Final Value - Initial Value) / Initial Value) * 100.
Since Kiva doesn't pay interest to lenders, this ROI can range from -100% (a total loss of capital from defaults) to 0% (breaking even and pulling out all capital).
I don't like using this ROI index for Kiva because
a) it doesn't reflect the "grant" nature of these "loans;" and
b) it doesn't reflect the "re-lending" multiplier effect Kiva encourages.
I don't know if such an index that takes these factors into account is in common use anywhere, so I just made one up.
Payments Return on Investment (PROI) = ((Payments - Net Investment)/ Net Investment) * 100
I showed the details of how this index can be computed using Christopher's spreadsheet
at that discussion.
The advantages to using this PROI for Kiva lending, as I see them, is
a) it assumes money sent out is a grant until it comes back, and
b) it shows how re-lending funds can have an ever-increasing multiplier effect, even if all the initial investment eventually disappears.
Here are a few examples to show how this PROI works.
| Example | PROI |
| A loan of $100 with no payments: | -100% |
| A loan of $100 completely defaulted: | -100% |
| A loan of $100 with $50 repaid: | -50% |
| A loan of $100 with $50 defaulted: | -50% |
| A loan of $100 completely repaid: | 0% |
Two loans of $100 completely repaid
from a single investment of $100: | 100% |
Five loans of $100 completely repaid
from a single investment of $100: | 400% |
As of today, I have received about $800 in payments from my net investment of about $1,000. That means my current PROI is about -20%. Based on my entrepreneurs' schedules of payments, I should "break even" real soon now - the payments I have received will be equal to the amount I have invested. If I took everything out at that point, I still would have lost some cash due to defaults, but my money would have been repaid by someone due to re-lending. After that break even point, any further payments I receive shows how my "grant money" has multiplied itself.
I'm sure folks can pick lots of holes / improve this index, so go at it. The goal is to find a way to better represent the actual financial workings of the Kiva lending model.
