Microfinance programs harness Web to connect borrowers and lenders

You may have seen the brightly colored Kiva billboard on California’s Highway 101, urging motorists to “Make a micro loan today. Forever change a life.” Maybe you’ve heard Oprah Winfrey or Bill Clinton talking about the online microfinance operation started by a Silicon Valley couple.

The idea of providing relatively small loans, rather than donations, to help residents of developing nations start small businesses and work their way out of poverty has been kicking around for years. But experts say the Silicon Valley nonprofit has demonstrated how social networking and Web technology allows hundreds of thousands of people to turn traditional banking and finance on its head.

“It wouldn’t have worked, to begin with, without the Web,” said Premal Shah, president of Kiva, which posts profiles of needy borrowers on a site where prospective lenders can browse and choose how they want to allocate their funds. Kiva, which boasts a 98 percent repayment rate, announced last week that it has processed more than $100 million in loans over the past four years, a few hundred bucks at a time.

While others follow different financial models, the essential theory behind Kiva has inspired several Web-based microfinance programs, including MicroPlace, an eBay subsidiary that offers investors a financial return on loans to the needy, and other fledgling sites launched by former tech workers and grass-roots philanthropists.

All of them rely heavily on technology, from Facebook apps and widgets that individual lenders can use to find worthy borrowers and track their progress, to automated processes that lower the cost of distributing funds and collecting a steady stream of repayments from farmers, craftspeople and other budding entrepreneurs in Southeast Asia, Africa and even impoverished pockets of the United States.

These borrowers have little access to traditional bank loans, say microfinance advocates, but a financial stake as little as $200 can help them improve their lives by opening a small business or shop.

It’s part of a trend toward “the democratization of credit,” said financial industry analyst Mark Schwanhausser, who has studied “peer-to-peer lending” at Javelin Strategy and Research. “These sites allow you to broaden out and put two parties together in ways that go around the traditional institutions, like banks, that for ages were sitting in the center of the process.”

In addition to using the Web itself, Kiva has released a programming interface that outside developers can use to build their own programs for spreadsheets, maps and graphs for tracking loans, crunching data or alerting them about new borrowers who meet specific geographic or financial criteria. Naturally, there’s an iPhone app, too.

“The really cool moment of truth with Kiva is when you get your e-mail notice of your first repayment on a loan,” said Shah, a former PayPal executive who joined Kiva after founders Matt Flannery and Jessica Jackley formally launched the site in 2005. “It really generates word of mouth, when you’re at dinner with friends and you check your iPhone and it says you just got a payment back from a person in Azerbaijan.”

Shah also has ideas for improving the often-cumbersome repayment process around the world, which currently relies on field staff of locally based microfinance institutions to distribute funds and collect payments, often journeying to remote villages to meet personally with borrowers. In the future, Shah said, he hopes to develop a system of processing payments through mobile phones, which are more prevalent than Internet-connected computers in many developing nations.

MicroPlace uses a different financial model but also relies heavily on software and Web technology. Kiva is a nonprofit operation that does not pay interest to individual lenders, although borrowers pay interest to the local institutions that distribute the loans. MicroPlace, by contrast, is a registered broker that works with financial entities such as the Calvert Foundation, which pools the money of individual investors, provides the funding to local institutions, and then uses interest income to offer investors a return of up to 6 percent.

Though its Web site was developed independently, MicroPlace general manager Ashwini Narayanan said the operation builds on eBay’s experience with using automated software to process large numbers of payments, measure Web traffic and increase visibility through techniques that boost their chances of appearing in results from Internet searches.

MicroPlace is organized as a for-profit entity, drawing revenue from fees paid by the institutions that act as investment partners. Its corporate parent, eBay, covers some operational costs and says it will plow any profit from MicroPlace into other social initiatives.

“We’re not here to make money but we want to be financially self-sustaining,” Narayanan said. “We are focused on a market-based solution to poverty.”

On the MicroPlace site, visitors can browse among different funds and read sample profiles of individuals around the world who are borrowing from those funds. But in contrast with Kiva, investors aren’t able to designate a specific individual to receive a loan.

That’s a trade-off for a structure that enables MicroPlace to pay a return to investors, said Rob Katz, a portfolio manager for a nonprofit venture fund, who also blogs about microfinance. Still, Narayanan acknowledged that many investors seem motivated more by a desire to create some social benefit with their dollars than by the promise of a return.

That desire is also drawing visitors to other new microlending sites: Namaste Direct is a San Francisco operation that uses donations to fund microloans for entrepreneurs primarily in rural Guatemala and Mexico. United Prosperity is a nonprofit recently started by East Bay resident Bhalchander Vishwanath, a former tech worker at Infosys, who is working with lending institutions in Vishwanath’s native India to start.

Vishwanath said his operation does not pay interest but seeks to leverage investors’ funds by using them to guarantee loans that local institutions make to needy entrepreneurs who can’t qualify for traditional financing. He launched the operation with software and technical help donated by NetSuite and the IT services company Cognizant.



Kiva (www.kiva.org) is a nonprofit that works with local “microfinance institutes” in 49 countries to screen borrowers, distribute funds and collect repayments. Borrowers pay interest to cover the local institutes” costs; individual lenders are repaid their principal but not interest.

MicroPlace (www.microplace.com) is a for-profit subsidiary of eBay, which says it will reinvest any profits in other social ventures. It partners with financial institutions that pool individual investors” funds and channel the money to borrowers through local entities around the world. Borrowers pay interest, some of which is passed along so individual investors earn a small return.

NamasteDirect (www.namaste-direct.org) is a San Francisco nonprofit that collects donations to finance local entities that make small loans to “micro-entrepreneurs” in rural Guatemala and Mexico; it also provides mentoring and advice to borrowers.

United Prosperity (www.unitedprosperity.org) is a nonprofit that pools money from lenders and uses the money to guarantee loans that local institutions make to needy entrepreneurs who can”t qualify for traditional financing. When the borrowers repay the loans, the lenders can take their money back or recycle it into another loan guarantee.

(c) 2009, San Jose Mercury News (San Jose, Calif.). Source: McClatchy-Tribune Information Services.