A Little Money Goes A Long
Way
Using the power of
social networking to help small businesses around the world
Ann Brown and Maria Martinez have never met, but last March Brown
loaned Martinez $50. It was part of a $400 loan Martinez needed to
get her clothing store up and running in Danli, Honduras. She used
the cash to buy colorful hairbands, bright shirts, frilly
button-downs, and baby onesies. Sales have picked up, and now
Martinez is paying Brown back in monthly installments via the Web
site on which they found each other, Kiva.org. "When I was starting
my handbag business, a neighbor wrote me a check for the startup
capital," says Brown, who sells bags at the Pike Place Market in
Seattle. "I had nothing, and that made it possible for me."
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Friends and neighbors have been lending one another money forever,
but as the Web makes virtual neighbors of strangers, Kiva, which is
Swahili for "agreement" or "unity," is harnessing the power of
social networking to support microenterprise in the developing
world. From Honduras to Uganda, microfinance institutions post
MySpace (NWS
)-like profiles of people who need capital to start or expand their
businesses. Then lenders -- aka you and I -- can sift through pages
of business ideas and grant loans in increments as tiny as $25.
PayPal (EBAY
) processes the transactions for free, and lenders receive monthly
repayments. The lender is out the money if entrepreneurs don't pay
up, but microcredit has earned a reputation for high payback rates.
In the five months since its launch, says Kiva, the site has had no
defaults. It has processed $200,000 in loans, disbursed among 450
entrepreneurs.
That might not seem like a lot of money. But a little goes a long
way. A $500 loan through Kiva has changed Elizabeth Omalla's life.
The widow from Tororo, Uganda, supports 11 people by selling fish.
Thanks to the loan, which she already has repaid, Omalla now sells
more varieties of fish and, as she blogs on Kiva, has been able to
"take my children to school, buy two cows and five goats, and open
a savings account." It's this one-to-one interaction that has
microfinance advocates praising the model. Says Alex Counts,
president of Grameen Foundation, the pioneering microcredit
institution: "Kiva could raise awareness about microfinance among
people who might not otherwise learn about it."
BYPASSING LOCAL BANKS
Kiva got started as an experiment after Stanford Business School
students Matt and Jessica Flannery traveled to East Africa to
review projects for the microlender Village Enterprise Fund. They
noticed that VEF, like many of the 10,000 microlenders around the
world, had to rely on local banks to provide capital for the loans
it disbursed. These banks often charge interest rates of 12% or
more. Because the microlenders must also cover hefty administration
fees, loan recipients usually paid as much as 35% in interest. Matt
Flannery knew of Web sites such as Prosper.com and Zopa.com that
let folks in the U.S. and Europe extend personal loans to one
another. Why not globalize it? The microlenders would bring loan
requests directly to Kiva, cutting out local banks. Although they
would still charge some interest to cover overheard, Kiva hoped to
cut the cost of loans in half.
Within a year the couple got the site up and running. Matt quit his
day job as an application developer at TiVo Inc. (TIVO ) and recruited
former PayPal executive Premal Shah to help run it. Kiva has since
been inundated with potential investors, particularly post-B-school
types in search of a socially meaningful side of the corporate
world. Bill Gilroy, a 33-year-old vice-president at private-equity
firm Global Reach Capital, invested $100 last fall. He has received
$20 back so far. "I sent an e-mail blast out to 150 friends," he
says, "and many have told me they've [loaned money], too."
As the number of microlenders partnering with Kiva grows, some
causes are proving more popular than others. Widows in Africa are
almost always funded immediately, but men in Central America often
have to wait longer. The Kiva team plans to experiment with higher
interest rates on less popular causes to help attract funders. With
a bit more tinkering, they believe, the power of market forces will
fix the disparity.
Business Name: Faster Than Light
Taxi Location: Danli, Honduras Entrepreneur: Alfredo Hernandez Espinal Activity: Providing transportation to people with
a taxi Start Date: April 1, 2006 Loan Amount: $500 Status: raising funds