- How does Kiva think about impact?
- What are recent academic studies revealing about the impact of microfinance?
- How is Kiva working to respond to these academic studies, measure impact and improve microfinance?
- What is Microcredit Plus?
- What is Kiva doing to directly measure the impact of its own programs?
- How has Kiva changed so that it can partner with innovative organizations outside of traditional microfinance?
A: As recently as 2012, the World Bank estimated that there are 2.5 billion people who are “unbanked” and without access to basic financial services. Without this access, many people who need credit are at the mercy of informal moneylenders.
To address this, in 1976, Professor Muhammad Yunus started making a series of small loans (averaging 64 cents each) to 42 women from a nearby village. One of the women told him that she could only borrow money for raw materials from local paikars (middlemen). When Yunus asked her why she didn’t borrow money from moneylenders instead, she explained that moneylenders were charging 10% interest a week -- some as much as 10% interest a day. And of course, the women didn’t have accounts at the local bank from which they could draw savings or apply for credit. (Source: Banker to the Poor: Micro-Lending and the Battle Against World Poverty, by Muhammad Yunus.)
Professor Yunus and others have helped drive access to basic financial services to millions of people. There’s still more work to do with 2.5 billion people lacking formal access to financial services. But as of late 2008, there are more than 2,400 microfinance institutions in existence, representing 99 million borrowers in 117 countries. (Source: MIX Market).
The microfinance industry has come a long way. But with so many MFIs now providing financial services, many in the industry are assessing its poverty alleviation efforts with renewed vigor. Is microcredit helping move people past the poverty line? That’s a key question, and one that a growing number of industry researchers and academics have been focused on for the past decade or so.
A: Randomized control trials (RCTs), where subjects are “randomly allocated to receive one or other of the alternative treatments under study,” are considered by some to be the “gold standard” of academic research.
Since 2009, there have been a growing number of RCTs focused on microcredit. The initial results show that traditional microfinance products are having a positive effect on the growth of small businesses. (For a survey of the literature on microcredit’s impact, please see the DFID commissioned review in Aug 2011 and the Grameen Foundation commissioned review in May 2010.) But they’ve also shown that to date, there’s limited evidence that microfinance has helped alleviate poverty.
Kiva’s mission is to connect people through lending to alleviate poverty, so we’ve been following these findings closely to learn as much as possible about how we can evolve Kiva to make the biggest difference.
Q: How is Kiva working to respond to these academic studies, measure impact and improve microfinance?
We believe that offering microcredit helps serve the 2.5 billion “unbanked” by helping them get access to formal sector financial services. Financial inclusion doesn’t single-handedly cure poverty, but it can be an important stepping stone toward poverty alleviation (e.g. income smoothing, capital equipment financing, etc).
But we want to go further. At Kiva, we’re in a unique position to help the industry adapt and evolve. We’re one of the few organizations that works with a broad range of MFIs and other impact-focused organizations (we have 241 Field Partners as of early 2014). With our 0% capital, we’ve found that many organizations are more willing -- and financially able -- to experiment with us in order to find ways to make an impact.
We call this Microcredit Plus. In that, we’re exploring several promising avenues where academic studies and randomized control trials have already shown impact in microcredit.
Microcredit Plus typically refers to the non-financial services offered alongside loans (e.g. entrepreneurial training) which have shown to have a substantive impact when combined with traditional loan products.
Kiva is expanding the idea of Microcredit Plus by taking the best practices of microcredit and increasing impact through additional services and flexibility alongside loans.
Several of our most promising Microcredit Plus initiatives are built off recent RCTs and other academic studies:
- Microcredit + Flexible Repayments
- Microcredit + Income Generating Assets
- Microcredit + Health & Education Services
- Microcredit + Lower Interest Rates
1. Microcredit + Flexible Repayments
The longest randomized control trial in microcredit (Erica Field, Rohini Pande, John Papp, and Natalia Rigol, forthcoming) looked at the impact of flexible repayment contracts -- specifically grace periods.
Currently, most microcredit loan contracts have an immediate and fixed repayment schedule (weekly, bi-weekly or monthly). By allowing a treatment group to delay their first repayment 60 days, researchers found that over three years, weekly business profits were up 41% and household incomes jumped 19.5% versus the control group.
Why the increased impact? More flexible repayment schedules shifted household investment decisions from lower risk petty trade (e.g. buying and reselling saris) to higher risk durable income-producing assets (e.g. a sewing machine).
However, this kind of repayment flexibility also created higher default rates -- 6.2% defaulted vs. 1.7% in the control group. Normally, this can create issues with a traditional MFI: when default rates increase, MFIs are often forced to go back to their standard loan products with less flexible repayment schedules.
Capital from Kiva lenders changes the equation. Our lenders offer 0% interest loans to MFIs, and are often willing to accept a lower repayment rate from borrowers if there’s an opportunity to have more of an impact. As a result, our MFI Field Partners have more flexibility to accept a higher default rate for borrowers.
To encourage our Field Partners to explore these sorts of impactful uses of Kiva capital, we require well-established MFI partners to experiment and find better-adapted loan products that are in the sweet spot of improved client outcomes and financial viability (e.g. with grace periods). And right now, about 35% of our loan volume is funding this kind of R&D in over 60 new loan products from our MFI partners. To help facilitate this growth, we’re working to educate Kiva lenders that there are opportunities to take on more risk in exchange for making more of an impact.
Leading academics who have previously been critical of Kiva and other microfinance NGOs, such as Dean Karlan, now praise Kiva for being a resource engine for this type of microcredit R&D -- an effort we call “Kiva Labs”.
Karlan: “Kiva Labs allows individuals to help fuel innovation... to help provide the subsidy (here, by absorbing the risk) necessary to motivate [MFIs] to innovate, to tinker, to find ways to improve their loan contracts so as to improve the impact of the credit on the lives of the poor.”
2. Microcredit + Income Generating Assets
We’re also partnering with many new, innovative non-MFI Field Partners who offer income-producing assets. Consider Evidence Action, a non-profit organization committed to only scaling solutions whose efficacy is backed by rigorous evidence. Kiva lenders are now helping to fund their flagship program, Dispensers for Safe Water, which provides chlorine dispensers that expand access to clean water at the community level and have already had a tremendous impact on health and the environment.
Chlorine-treated water reduces diarrhea by 40%, and in a randomized control trial vs. other chlorine treatment options, Dispensers for Safe Water showed a near 10-fold increase in adoption. As further evidence of impact and innovation, these loans can be repaid via income generated by the voluntary carbon credit market. (The credits come about because community members are no longer burning wood to boil and decontaminate their water.)
We’ve also seen promising results from many of our partners that are tracking agricultural yields for borrowers before and after participating in their respective loan programs. Here are a few examples from Kenya alone:
- Through One Acre Fund, Kiva lenders financed agricultural inputs and training for subsistence farmers (repaid post-harvest) that have been shown to increase farmer incomes by 100% vs. control group of farmers not in the program.
- With Nuru International, Kiva lenders supported a farming program with training, maize seed and fertilizer, which increased the average maize yield by 123% over the previous year.
- And at Honey Care Africa, Kiva lenders financed beehives for subsistence farmers, growing income by $60 per hive per year, with a typical break-even of 1 year and an additional benefit of 15-30% higher crop yields from cross pollination.
Finally, there are real-world solutions making an immediate impact in the lives of borrowers, like clean burning cookstoves. These cookstoves have been shown to reduce emissions, improve health (reduced smoke inhalation) and save households money on cooking fuel. Kiva partners such as Paradigm Project, BrazAfric and VEP offer these types of loans, helping bring these impactful cookstoves to the working poor.
3. Microcredit + Health / Education Services
Several RCTs published since 2003 have found that MFIs which add wraparound services to their microcredit offerings can help alleviate poverty:
“A comprehensive impact evaluation of Pro Mujer Bolivia was performed in 2003 by FINRURAL. The study analyzed the effect of the integrated services on the poverty level of clients with more than two years of membership, compared to a similar group without exposure to Pro Mujer’s services. The conclusion was that the services decreased the level of poverty, as 20 percent of program participant households were considered poor, while 40 percent of non-participant households were considered poor.”
Source: From Microfinance to Macro Change: Integrating Health Education and Microfinance to Empower Women and Reduce Poverty (2005), Evaluación de Impactos de Programas para La Mujer (Pro Mujer) Bolivia (2003)
"There is evidence, in this study, of significant poverty alleviation impacts of NFS [non financial-services] around the asset poverty line, i.e. for the better-off clients within the sample. This is contrary to our expectations, because in practice NFS frequently target the poorest borrowers of the MFIs as these are thought to take more advantage of this type of interventions. However, our findings are in line with the argument that microfinance borrowers might experience higher impact at higher levels of income (Hulme and Mosley, 1996). [...] Aiming to reduce vulnerability, these programs encourage mechanisms that prevent future unexpected events and cushion for them."
Source: Microfinance Non-Financial Services: A Key for Poverty Alleviation? Lessons from Mexico (2011)
A paper by Karlan and Valdivia with IPA and FAI also found that providing female microentrepreneurs in Peru with entrepreneurial training, “led to improved business knowledge, practices and revenues. The program also improved repayment and client retention rates for the microfinance institution."
So why doesn’t every microfinance institution offer additional wraparound services? A study from University of Groningen faculty found one likely reason: “MFIs that provide social services in addition to financial services perform worse financially but better in terms of reaching out to the poor.”
With Kiva’s 0% capital, we are in a unique position where we can help partners subsidize the addition of wraparound services to their microcredit offerings. Two examples include:
Family and Community Empowerment Services
- Health-care Services: Many organizations partner with health-focused agencies to provide health care services to their clients who are more likely, as a result of good health, to be able to repay their loan.
- Education Services: This can include educational workshops on topics that are not financial in nature, such as the prevention of disease and domestic violence.
At Kiva, we have 78 active Field Partners that earned a “Family and Community Empowerment” social performance badge in exchange for offering these services in addition to their financial products to meet the needs of the people they serve. So far, Kiva lenders have lent $223 million to borrowers of these partners.
Entrepreneurial Support Services
Kiva aims to partner with organizations that offer entrepreneurial support to the people they serve. This support can come directly from the organization or in partnership with a separate, qualified agency. Borrowers are able to participate in classes to learn basic business skills like budgeting, allocation of profits and market analysis.
At Kiva, we have 105 active Field Partners that have earned an “Entrepreneurial Support” social performance badge in exchange for offering a comprehensive suite of services to people building a business. Kiva lenders have lent $242 million to borrowers for these partners.
Together, there are 137 active Field Partners that have either or both of these social performance badges, totaling $308M in loans.
4. Microcredit + Low Interest Rates
Kiva is working to lower the interest rates for borrowers in a few ways:
0% and low-interest loans from Microcredit Plus partners
More than 30 of our new Microcredit Plus partners are offering loans at 0% interest, including:
- Nazava Water Filters sells a ceramic filter candle that allows Indonesian households to filter their own tap, well, river or rain water. Indonesian households spend an estimated 8% of their income on drinking water, so Navaza’s water filters save money and protect the health of household members (including children). Kiva enables 0% interest loans to Navaza’s network of resellers, who drive adoption of water filters in poor, rural areas.
- Sistema Biobolsa manufactures and distributes small-scale, affordable biodigester systems that transform livestock waste into organic fertilizer for crops and biogas for cooking, heat and electricity. Sistema Biobolsa offers a 0% interest loan program to help farmers spread out their payments for biodigesters over a period of six or more months, allowing the system to “pay for itself” during the repayment period.
- NOTS Lampe Solaire sells and distributes solar lamps, aiming to replace all kerosene lamps in Mali with clean, safe solar alternatives by the end of 2016. Because of Kiva’s 0% interest loans, NOTS is able to offer credit to distributors and women’s associations at 0% interest.
Overall, we have 80 social enterprises that are either non-MFIs or under our Experimental Partnerships Program, with an average interest rate of 10.4%. (Please note that unlike our portfolio yields, these interest rates are self-reported and not from audited financials, which are available for many MFIs in the MIX Market.)
0% loans through Kiva Zip
In 2011, we launched Kiva Zip, which lowers the borrowing cost to 0% interest. It does this through local trust networks (430 Trustees) and technology (M-PESA / PayPal).
Loan products with reduced interest rates from MFI partners
Several of our MFI partners have used Kiva's 0% interest capital to develop new loan products at a lower interest rate than their standard counterparts.
- Caja Rural Senor de Luren developed a water and sanitation loan product at a reduced rate that Kiva lenders are now funding for homes across Peru.
- Hattha Kaksekar Limited (HKL) developed new loan products for biogas digesters that serve Cambodian farmers at a lower interest rate. A typical loan under this program is $500 with an average 12-month term, and a declining balance interest rate of 1.2% per month (compared to the regular loans at 2.5-2.9% per month).
As much as we’re encouraged by the positive research emerging around innovative loan products, we also recognize that comprehensive data about microfinance’s impact is still very limited. And we want to help push the industry forward to find (and scale) the microfinance solutions making the biggest difference. That’s why we recently partnered with Innovations for Poverty Action, a research group that applies rigorous techniques to develop, test and scale proven solutions to real-world problems faced by the poor in developing countries.
With their research efforts, we'll be learning more about the effects of flexible repayment schedules on borrowers in Ecuador. We’ll also examine the merits of social underwriting with Kiva Zip in Kenya, and how the results of character-based lending compare to their traditional counterparts.
Q: How has Kiva changed so that it can partner with innovative organizations outside of traditional microfinance?
A: For the first five years of Kiva’s existence, we focused on working solely with microfinance institutions. Since then, we’ve made a number of significant changes so that more easily partner with innovative non-profits, schools and other organizations.
How Kiva Worked Before 2011:
For many years, Kiva required strict due diligence efforts for each and every Field Partner.
- We required that every single Kiva Field Partner go through a full due diligence process, where we gathered 38 variables of information from potential partner organizations.
- We also required an on-site visit (with the exception of partners in countries with a security risk).
- Drawing on those findings, we would then use a formal risk model designed for the microfinance industry in order to assign a risk rating between 1 and 5 stars to each partner, reflecting the risk of institutional default. Those risk ratings were also used to determine how much credit was available to each of our Field Partners.
While these due diligence efforts helped minimize the risk of losing lender capital when banks failed, it also meant that we weren’t always able to partner with smaller, innovative organizations that were making an impact on poverty alleviation outside of formalized microfinance.
So starting in September 2011, we revised our due diligence process to enable new strategic partnerships in three important ways:
1. We started allowing partners without a formal risk rating
For non-MFI partners, we started allowing partners to go through our full due diligence process without receiving a formal risk rating. This was a critical step, because our risk model is specifically designed for microfinance institutions and therefore doesn’t work well for organizations whose core business isn’t credit. By offering loans that were not rated, we were, for the first time, able to partner with non-MFIs that were doing innovative and impactful work.
In order to help lenders make informed decisions, we label loans from these partners as “Not Rated,” and we manually set a lower credit limit than we would offer to our partners with risk ratings. (Credit limit meaning the total amount outstanding that a Field Partner can have at any given time.) In this way, lenders were able to make an informed decision about how much risk they were willing to take on, while Kiva was able to partner with innovative and exciting organizations beyond formal MFIs. As of March 2014, Kiva is partnered with 16 such organizations with full due diligence who also don’t have a formal risk rating, including:
- Barefoot Power - providing affordable solar lighting and phone charging solutions to low-income populations without to electricity)
- One Acre Fund - focused on helping East Africa farmers to increase their profits
- Evidence Action - bringing chlorine dispensers to market to expand access to clean water
2. We started allowing varying levels of due diligence for partners
We also started offering a “Basic” level of due diligence to partners, as opposed to the full due diligence that we had traditionally required. For these partners, we performed a basic amount of due diligence, without requiring an on-site visit.
Due to this lower level of due diligence, loans to borrowers through these partners implies a higher level of risk. Fortunately, many Kiva lenders have shown us that they’re willing to accept higher risk in exchange for working with smaller, innovative organizations.
In order to make sure that lenders are aware of these increased risks, we label the loans as Not Rated and as having gone through basic due diligence (as opposed to full due diligence). Also, because Kiva lenders would be accepting a higher level of risk for these partners, we set the credit limits for these partners at a lower point.
These efforts allowed us to partner with a wider range of innovative organizations while limiting the amount of lender capital at risk. As of February 2014, 42 basic due diligence partners include:
- Maya Mountain Cacao- paying farmers a guaranteed fair and stable price for their cacao, with a price floor above the Fair Trade premium.
- Entrepreneurs du Monde - working to expand access to energy-efficient stoves and gas stoves in remote, rural areas.
3. We started allowing “Experimental Partners” with smaller credit limits
As Kiva expanded beyond microfinance institutions and began to work with a range of organizations, we received an outpouring of interest from socially-driven companies, non-governmental organizations (NGOs), non-profits and other groups across the globe. Time and time again, we heard how these types of organizations are constrained by limited access to capital -- how even a small amount of credit could jump start their work and help them reach more people.
So in September 2012, we created an “Experimental Partnership Program.” As we describe it in our Risk and Due Diligence section:
Experimental partnership is a designation of due diligence that is available for organizations seeking to use the Kiva platform to experiment with small lending programs. Currently, the initial credit line available for an experimental partner is $20,000. Field Partners designated as experimental hold conversations with members of Kiva's investment team but are not formally vetted, nor are they reviewed by the whole investment team.
Experimental partners that perform well with their early loan postings may be eligible to access up to $50,000 based on Kiva's review of their work and ability to absorb and manage additional funds. Kiva hopes that this new partnership type will allow organizations with small credit needs to join the platform at a low operational cost for Kiva, allowing for experimentation in real-time at low levels of exposure.
As a result of all these efforts, Kiva is working with more strategic partners than ever, and we’re continuing to invest in finding partners that are solving problems in education, agriculture, clean energy, water and sanitation, fair trade, health, and transportation (among others). As of February 2014, Kiva has 34 experimental partners, including:
- BagoSphere - providing vocational training in the Philippines at 0% interest to rural youth to help them prepare for call center jobs.
- iSmart Kenya - creating jobs for youth in Kenya by leveraging market demand for difficult-to-access, life-improving technologies in slum communities.
- TAHUDE Foundation - promoting renewable energy distribution such as solar power and biogas in Tanzania.
By evolving our model to work with a growing number of these strategic partners, we’re also able to uniquely leverage the capital from our lenders, who are often willing to accept slower repayment and higher defaults in exchange for the opportunity to have a greater impact with innovative solutions to poverty.