Larger Loans Q&A

Q: Why is Kiva allowing Field Partners to post larger loans to the website? 

A: In keeping with Kiva’s mission to connect people through lending to alleviate poverty, we are committed to making sure lenders’ capital is being used to address poverty in the most effective and impactful ways. Most of the time, that’s through catalytic microloans that enable borrowers to make transformative changes in their lives and the lives of their families.
 
But we also see that ideas for addressing poverty can happen on a bigger, community-sized scale -- ideas that don’t work or grow simply because the businesses lack financial access. In addition to our desire to help improve access to capital for social businesses, Kiva strongly believes that the largest development gains are enjoyed not only when there’s a thriving microenterprise sector, but when we also see a healthy number of small enterprises that can create jobs for other members of their community.
 
With crowdfunding platforms literally raising millions and millions of dollars for gadgets and video games, we want to find out if it is possible to crowdfund poverty solutions for those who are left out of both microfinance and traditional banking systems. We couldn’t be more excited to offer our lenders the choice to support these new types of businesses on Kiva.

Q: I thought Kiva was about microlending. Are these larger loans still considered microfinance?

A: In most emerging markets, the average microfinance loan is under $1,000, so these larger loans on Kiva are not considered microloans. In development terms, they’re on the “small” end of “small and medium enterprise loans,” so they’re definitely a breed apart from the average $400 microloan you might see on Kiva’s site.
 
At the same time, we don’t think of ourselves as just about microlending, but instead about connecting people through lending to alleviate poverty. Microloans will continue to constitute the vast majority of the loans posted to the site, but we also believe that addressing an issue as large and complex as poverty is best tackled from a variety of different angles. And today, one of the biggest unmet needs to spur economic development in less-developed countries is the Missing Middle (small enterprises that create jobs and provide large-scale solutions for poverty). We believe that by supporting both types of loans, we can all play a significant role in building the foundations for thriving communities both today and long into the future. 

Q: How do larger loans impact the Kiva ecosystem?

A: The two main concerns shared by both Kiva and our lenders is that larger loans will contribute to more expirations on Kiva, or that they will slow down the “recycling” effect of quick loan repayments.
 
Expirations happen when a loan posted to Kiva isn’t fully funded within 30 days. In cases where the loan has been pre-disbursed, the Field Partner must use other sources of funding to cover the loan amount that isn't funded by Kiva lenders. And in cases where the loan is only disbursed after being fully-funded, the borrower doesn’t receive any funds if the loan expires. 
 
The specific concerns we’ve heard raised about larger loans are that 1. they’re more difficult to fund given their larger amounts, and 2. they may sap up lender capital which could otherwise go to support a large number of smaller loans. 
 
Expirations are a big deal to us, especially when you consider the financial health and opportunities of borrowers and Field Partners alike. However, expirations are unfortunately a natural part of the Kiva marketplace, and have been even without the addition of larger loans. But this isn’t to say that we accept it and are moving on. We are continuously monitoring the marketplace balance and looking for ways to improve the relationship between the amount of loans fundraising and how much lenders are funding. One of the more promising updates on this front is a suite of tools we’re developing for our Field Partners to better inform them about the best times to post loans of all sizes based on past lender behavior, seasonality, etc. Our hope is that these tools will result in more informed partners and ultimately fewer expirations on Kiva.
 
We’ve also seen concerns about loans with longer repayment terms, and the argument that lenders could be getting repaid much sooner and recycle that money to help more borrowers. Lenders who recycle their loan repayments and continue to make new loans are vital to the sustainability of Kiva. While we've started to allow loans with longer and more diverse repayment schedules to be posted to Kiva because we believe these loans are better targeted to meet borrower needs, this subset of our portfolio still accounts for a very low percentage of the overall amount funded through Kiva. As we grow, we’ll continue to monitor the diversity of repayment schedules for all loans -- from the multi-year small enterprises all the way to the short-term microloans that constitute the vast majority of our portfolio. 

Q: What types of businesses will Kiva support with larger loans?

A: The underlying characteristic of the larger loans that you’ll see posted to Kiva is that they fall in the Missing Middle -- the underserved small enterprises between microloans and traditional bank loans. We expect these businesses will also have a strong social impact or spur the local economy through job creation, and sometimes both! Here are a handful of examples of larger loans the Kiva community has already funded:
 
  • The Arimae community took out a $10,000 loan to grow and harvest plantains in an indigenous community in Panama.
  • Reynaldo received a $20,700 loan to upgrade a community water purification program in the Dominican Republic.
  • Renee Olivia used a $24,800 loan to expand a weaving business in the Philippines and provide her community of artisans a stable source of income. 
  • Shireen is putting a $25,000 loan toward improving the safety of an Iraqi kindergarten. She plans to install a fire alarm system, fix water pipes, and renew furnishing and carpeting as required by local regulations. 
  • Mark Jonathan will be using a $50,000 loan to set up a solar light distribution network in Papua New Guinea where only 10% of the population has access to electricity. 
Q: Why aren’t these larger loans being provided by traditional banks?

A: Traditional banks don’t serve these small enterprises for many of the same reasons they don’t serve entrepreneurs with traditional microloans. One of the primary reasons is that it simply isn’t profitable. Many businesses prefer to remain in the informal sector and do not have bank accounts. Those that do have bank accounts are relatively small and have much lower revenue potential per enterprise than larger businesses. On top of that, it’s common for these small enterprises to need technical assistance related to best business practices, which can add to the bank’s overhead costs. And unless banks view this sector as a viable market, it’s unlikely they’ll develop the necessary strategy, products, delivery channels and risk management systems to address it.
 
There are also many regulatory barriers that can diminish the incentives a bank may have to work with smaller enterprises. For example, banks may have difficulty with enforcing a loan’s collateral, lowering operational costs through out-of-court settlements or having well-protected creditor rights during a default. 
 
Finally, there’s typically a lack of financial infrastructure in many of these regions. Specifically, a lack of robust credit reporting systems, accounting and auditing standards, insolvency regimes, as well as functioning payments and settlements systems which help address legal uncertainties that lenders face.