Kiva Loan Default Insurance for lenders

[Guest]

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[Ramón]

Someone (I forgot who) mentioned this earlier on this forum-- and I think it is an excellent idea!

Why?

• It will put them mind to rest of risk averse lender and allow them to lend more money
• If the insurance premium is higher than Kiva's default rate (say, 10% + transaction costs), the profits of the venture could be repaid as gifts to Kiva

Who would help me brainstorm what it would take, what the risks are, etc. of setting up something like this?
Some things that come to mind:

Service offered:
- A Kiva lender can insure their loan against default within 1 month of their payment to Kiva towards this loan
- A Kiva lender will get a Kiva Gift Certificate for the loan amount if the loan goes bankrupt

Risks:
- What will happen if Kiva's default rate would unexpectedly start soaring? Raise premiums, etc? Would we close down/go out of business/bankrupcy?
- Should there be a maximum amount that we are willing to insure? Do we really want to insure lenders who prefer to pay $1500 to a single lender, or should our mission be concentrating on those that need the little extra push to get into Kiva in the first place?

Structure:
- This venture would probably be housed as a business entity, to avoid mixing our personal finances in
- Are there any regulatory issues around this? The insurance industry is heavily regulated, and the need for expensive independent audits would stop our efforts cold.

Costs/Revenue/Profits:
- We should make sure that the premium include money to cover our costs: webhosting, setting up an official company, bank (paypal?) account to the transactions, possible tax filings, etc.
- We should make sure that we make enough revenue to build up a cash reserve
- We should also make sure that we can realize enough profits to be able to donate to Kiva. Again-- the venture would not be for personal profit; all "profits" would go to Kiva

Competition:
- Are there existing (commercial/non-commercial) companies that already offer this? How much do they charge? What are their business strengths and weaknesses?

Anyone with experience here that is willing to help this think through? Since this would probably involve "real" money, I'd want to write a mini-business-plan that covers this before I'd start. I think that we would need very little starting money...

Please let me know. You can also email me (First.Last@gmail.com).

--Ramón

[AccountAbility]

Ramon, in the interest of brainstorming, how about this.  there are a number of MFIs who are pooling say 10 borrowers together so that the whole pool is responsible for repaying a loan if it gets behind.  How about taking that concept and applying it to lenders?  Anyone who is a little nervous about lending could somehow team up in a group of loans with a group of lenders.  No insurance regulations, no additional reserves.  It certainly would work with those of us who intent to reinvest loan paybacks in any event.  Maybe this would be a concept that could be explored in Richard's Groups thread.

[RichardF]

This topic seems to be the flip side of "paying interest to lenders."  If someone is worried about "getting their money back," then they aren't thinking of their Kiva money as a "donation," they're thinking of it as a "loan," which it is.  The classical way to address this "risk" is to charge interest. 

Since so many folks here seems to be of the opinion that paying interest to lenders would "spoil" the experience for them (they think of their Kiva money as a donation), perhaps Kiva eventually could offer an "interest option." First, Kiva charges some small interest rate (e.g., 5% +/- whatever it takes to match the overall default rate).  Then, lenders could opt to either directly receive their share of the interest or designate it for the "defaulted loan pool."  This pool could be used to repay lenders their share of defaulted loans (up to the amount in the poll and minus administrative costs, of course).

[chris]

Someone (I forgot who) mentioned this earlier on this forum-- and I think it is an excellent idea!

Thanks! 

Your proposal is interesting, and different from what I was initially thinking.  I was considering how the insurance industry doesn't cater to entrepreneurs in the developing world, much like how large commercial banks shunned the same group of people.  Yunus became the banker for the poor, but there seems to be a lack of other financial services for the same group of people.  So my concern is primarily for the businesses, not the lenders.  Personally, I don't care much about the occasional loan default; that's why I diversify.  But in case of disaster, the impact on the borrower can be quite tragic. 

Say a borrower uses their loan to buy a motorcycle so they can make deliveries of a product they sell.  If the motorcycle is stolen or lost in a flood before the loan is paid off, the borrower and the lenders both lose.  If the borrower had insurance, then the repayment would continue after a bit of a delay. 

I think the MFIs would be the organizations interested in persuing this.  Borrowers listed on Kiva as being insured would likely be funded more quickly than those that are not.  I have no idea if this is a feasible idea or not, but I would assume that at least established borrowers might be eligible for such a program.

[RichardF]

"Microinsurance" and "microsavings" are offered by some MFIs.  The MIX Market MFI section lists such offerings by some of them.  However, I also agree most Kiva entrepreneurs probably have very limited access to a full range of financial products and services.

[cpbailey]

I don't know if my suggestion of an "insurance" was the one to kick this off.  I was thinking that the partner pay a percentage of a loan up front or along the way.  Say 3%.  This amount in their balance would grow as more loans were made, and at a given ratio or amount the 3% would drop to say 1.5%.  If loans weren't paid, then this amount could go up.  The partner is charged a minimal rate which would pay off bad loans within their portfolio, and a percentage could be used to pay off other Kiva loans.  It could be tinkered with so that after smooth sailing for an extended period of time with the fund at a given amount, it would freeze.  Maybe it freezes at 5% of current loan balance for the organization.  Deductions are made for loans written off by the organization, and a smaller percent for other bad loans.  Kiva could have a 1% of average loan balance to cover costs, IF there were funds available after paying off the loans.

I think overwhelming people want to give use of the money without interest, but this would reduce the risk of losing all the principle.  Which would satisfy those of us who would loan more but have been spooked a bit by certain partners who seem to have major issues.  And I wonder if there are more to come.  If default rates start jumping, then it will be harder to get more people to put money into Kiva.

Oh, and I would LOVE to see three months or more behind in payments type category.  THIS would be more telling that the loan is likely to default.  If payments are seriously behind, it would be nice to have a journal entry...

Colette

Colette

[Ramón]

Woow... lots of responses in a short period of time

So, regardless of who came up with the idea in the first place, my initial thoughts were to allow doubtful and risk averse LENDERS to be pulled in. Let's address that first (and then I'll talk about default insurance for the entrepreneur).

The reason I brought it up was to attract more lenders into the pool. I think the "repayment" idea is a very strong idea for lenders, because many of them are tired of giving charity to an anonymous organization that spends half on their inefficient organization and the other half in anonymous projects that often have unmeasurable results. Being able to tell them "you get your money back -- and if the  borrower defaults, well, you can get insurance for that" is a very strong argument. It's a meant as a marketing tool more than anything else.

Now let's get to the borrowers. Personally, the reason I like Kiva and microfinancing, is because there *is* an expectation of paying interest and paying back. The fact that it's a loan motivates the entrepreneur to invest is wisely. As Julia often repeats-- it's their only chance. They will pay back. If it's a gift, it's very hard to put an expectation of success against that, because it's all carrot, and no stick. So default insurance, although important for the MFI (again-- the lender), I speculate would actually increase default rates. (Felipe would be better equipped to comment on this.) It again becomes a gift-- all carrot and no stick.

Enough philosophical argumentation

I actually like the "investment groups" that AccountAbility brought up. Thinking through my original ideas, I am afraid my suggestion would be way too complicated for the gain we'd get out of it. (Talk about backtracking...)

I am not sure how to actually do these "investment groups"-- I mean, in practice, how do you hook up complete strangers with eachother in a risk-sharing group, and how would you enforce the partial repayment after a default? Would these become group loans? Hmmm... maybe a website that allows forming these groups, and then allows collecting money and making one or more loans as a group... that would be a solution. How would you deal with Paypal charges? AccountAbility, (and all others too...) can you help out here?

thanks,

--Ramón

[RichardF]

PayPal always is ready to lend a hand with online payments. 
Here's part of a PayPal e-mail I recently recieved that probably could work for a "group of strangers."

----

PayPal makes group gift-giving easy

It's happening again. Your grad school roommate's getting married – and you're in charge of the group gift. Now you need to collect money from friends scattered all over the country. Luckily, PayPal makes it easy to:

• Request money from friends.
• Streamline the gift-giving process.

Get the details

[michael]

A very interesting topic.  A few thoughts from a former insurance underwriter.

I was thinking that the partner pay a percentage of a loan up front or along the way.  Say 3%. 

In retail lending, this is refered to as "recourse."  If a car dealer, for instance, (our MFI for this example) wants to sell a car to someone with less than great credit (our borrowers), the lending institution may require the dealer to put some skin in the game by guaranteeing some portion of the loan.  Depending on the specific terms, this may mean that a borrower default in the first 3, 6, or 12 payments results in the dealer taking back the loan (i.e., repaying the outstanding proceeds to the lender) or some percentage thereof.  If this "Loan with Recourse" option is not acceptable to the dealer, the lender might still make the loan, but at a much higher interest rate or faster repayment terms, etc.  Applying this model to our portfolios is an interesting idea, but it is one that Kiva itself would have to work out contractually with the MFI's.    Please note that this would necessarily increase the cost of business for the MFIs as they would now be absorbing the credit risk, so interest rates to the borrowers would be higher.  Something like this may be able to be set up by Kiva, but if this is not the industry standard that makes Kiva a less attractive partner to the MFI (why absorb the Kiva credit risk if there are other sources of funding / other microlending conduits out there that do not transfer this risk and its cost?)

As for an insurance pool, I am not sure that we have the wherewithal to do something as official as this to draw in business.  Such an entity would require regulatory approval in the equivalent of the State Corporation Commission or Office of Insurance Regulation in all states where the loan guarantee is offered.   This is not cheap.  And to use it to market Kiva (e.g. telling would be lenders that it's okay, your loan is guaranteed, etc.) a level of loan loss reserves would have to be maintained.  Reports would have to be filed on a regular basis to demonstrate the financial stability and integrity of the insurance fund.

Accountability's idea of an internal shared risk pool is more akin to a mutual assurance fund.  While this would help cover each other's losses, I don't know if it's a great sales tool to bring in more lenders -- in order to lay off their own risk, they have to absorb some of mine and yours.  Works for me, I'm going to lend anyway.  But I don't believe it adds to the attraction of the Kiva concept.


I think RichardF stated it well - the way lenders cover risk of default is by charging interest.  If we as a group of lenders feel we cannot absorb the 10% default risk ourselves, the way to offset this is by charging for our capital.  If we believe that we are able to live with the defaults that occur and absorb them as they come, then I think we are best served by maintaining contact with Kiva Prime and demanding more DD.  That, or leaving this alone and living with it.

Just my 1/1250th of a loan unit.

[Henry]

PayPal always is ready to lend a hand with online payments. 
Here's part of a PayPal e-mail I recently recieved that probably could work for a "group of strangers."

I'd be interested in loaning with a group if:
   Each Member gives equal monthly amounts
   Done Through PayPal
   Loan criteria - interest rate, term, reason for
   money pooled until paid in full or defaulted then distributed out equally
   KIVA holds control of account with 2 or 3 key individuals from across the world
   I'm positive there are other "if's" to place here

Advantage:   loss as a result of any default would be split over group reducing the amount from any individual.

It would be nice if KIVA could add a method of attaching these loans via groups to our own lender page.
IT would also be nice if KIVA could create a GROUP page showing distributions of each loan. 

Just stuff i'm thinking....  I know KIVA's busy and this would be small stuff....