Microfinance Example

Kiva.org is a non-profit organization started in 2005 that connects borrowers with lenders around the world. They act a conduit to for lenders to get funds to borrowers via their website through Field Partners. These field partners are local institutions with different business models including microfinance, social entrepreneurs, schools, etc. Field Partners can receive credit lines from Kiva that range from $20,000 to $2 million depending on meeting Kiva’s minimum requirements and the due diligence performed [3]. The one items that binds together partner commitment is the double bottom-line.

 

Individuals are offered the opportunity to choose the person or group they would like lend money. They can lend as little as $25 to borrowers. These loans are typically to help small businesses in undeserved and impoverish areas. Borrowers don’t expect to get paid interest for these loans. Kiva organizes loans into sectors from Agriculture to Wholesale with the main concentration of loans focused on Retail. [2] Since 2005, they have helped lend over $368 million with a repayment rate of close to 99% [1].

 

This approach set the stage for “for-profit” competitors. Let’s take Microplace.com as an example. Microplace offers you an opportunity change the world, while at the same time diversifying your investment portfolio. They are of creating a sustaining, scalable organization that can hit their bottom-line while appealing your yours. They are specifically attempting to siphon charitable donations that citizens would make to investing in impoverished areas. The main difference between the two is that with Microplace, you get interest on your loan.

 

Microfinance is not just limited to helping those in need. It’s popped up in helping the Americans who could use funds for inventory, infrastructure and to consolidate credit card debt. Proper.com has offered $418 million since inception with a rate of return of 10+%. [5] They have the same business model as Microplace, but have zero focus on helping poverty. They position themselves by asking why the big banks should be making all of the profit. Joe Average should be in on it as well. Prosper’s main completitor, Lendingclub.com appeals the same way.

 

Microfinance looks to have followed the path of disruptive innovation. They first began meeting the needs of undeserved markets such a countries in poverty or where the big banks would not play. Over time, the success of organization such as Kiva made the microfinance business model look scalable and profitable. Some like Microplace, replicated this model for the double bottom-line. Others, like Prosper.com, saw that this model could serve existing loans and non-customers and scaled their products out over the Internet. Microfinance is probably getting close to the mid-point on the “S” curve and still has a ton of room to grow with sustaining innovations and new competition. Microfinance looks like it’s here to stay.

 

 

 

References

[1] http://www.kiva.org/about

[2] http://www.kiva.org/lend?sortBy=random

[3] http://www.kiva.org/partners/info

[4] https://www.microplace.com/howitworks

[5] http://www.prosper.com/welcome/how_it_works.aspx

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One thought on “Microfinance Example

  1. tlhill2012 November 1, 2012 at 11:54 PM Reply

    James – Kiva is a classic, but worth a bit more exploration. AFter the initial buzz, there were questions raised about its transparency: Was the money really going to the people pictured on the pages? What fees were being charged? These kinds of issues.

    On the one hand, questions of transparency are perhaps even more important for social ventrues than for “regular” businesses (though they are increasingly important for all). On the other, one could argue that these issues were not failures of intention, or even eventual execution, but rather imperfections in an evolving model – the kind of imperfections entrepreneurs live with in all cases, and the kind of “good enough” models that Christensen argues are a starting point for many big changes. Thoughts?

    As for climbing the S curve, volume of money transacting is surely one measure. And competition is always a good sign – suggests that there is a model that might work and money to be made. An interesting paper might be to trace the rise of microcredit-type ventures in the US, analyzing failures and successes and trying to identify what external conditions – like laws, contracts, informal norms, familiarity – are necessary for success (institutional analysis), and what internal capabaities – such as processes and technologies for reducing the cost of placing and servicing loans.

    (As an aside, one of the EMC projects is thinking about just such issues for the funding of sustainable farms and farmers.)

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