How online lender is transforming lives through small loans
What you need to know:
- When it was established, the first borrower was a fishmonger in Uganda. She received $500 (Sh5,000). Today, over $700 million of loans have been issued out to 1.6 million small traders in 86 countries.
- “We only target high social impact products or sectors that ordinarily, many financial institutions would not be able to venture into.
- In recent years, investments focused on promoting social change have increased substantially and are playing a major role in Kenya and other East African countries.
A crowd funding venture that is providing interest free loans to entrepreneurs, is helping transform the lives of the less fortunate.
The organisation, Kiva, whose global headquarters is in US, and Africa office is in Nairobi, was founded in 2005. It offers loans from as little as $25 (about Sh2,500) to entrepreneurs across the world.
When it was established, the first borrower was a fishmonger in Uganda. She received $500 (Sh5,000). Today, over $700 million of loans have been issued out to 1.6 million small traders in 86 countries.
In sub-Sahara Africa, $170 million loans have been issued to 240,000 people with $38 million reaching 70,000 entrepreneurs Kenya.
“The repayment rate is at 98 per cent and one of the things Kiva is doing is democratising access to capital using technology. This lets capital flow to the parts of the world where it isn’t, so we seek out the riskiest parts of the world and the entrepreneurs that are under-served. We want to demonstrate to the world that they are very credible,” the microlender’s executive board chairman Julie Hanna said.
Kiva offers a platform where social investors — people, mostly philanthropists, keen on providing funding to poor or under-served communities for social-economic change — pool resources for interest free or low-interest lending.
Microfinance institutions (MFIs) that act as local agents recover their costs by charging interest. According to Kiva, there are three kinds of costs the MFI has to meet. The first two are the cost of the money that it lends and that of loan defaults, which are pegged on the amount borrowed.
“If the cost paid by the MFI for the money it lends is 10 per cent and it experiences defaults of 1 per cent of the amount lent, then these two costs will total $11 for a loan of $100 and $55 for a loan of $500. An interest rate of 11 per cent of the loan amount thus covers both these costs for either loan,” Kiva says on its website.
HIGH SOCIAL IMPACT
The third type of cost is transactional and this is not proportional to the amount lent. The transaction cost of a $500 loan is not different from that of $100. Both require roughly the same amount of staff time for a meeting with the borrower to appraise the loan, processing the disbursement, and follow-up monitoring on repayments.
“We only target high social impact products or sectors that ordinarily, many financial institutions would not be able to venture into. Some of these would ordinarily include agriculture, green energy, higher education (students acquiring loans) and being given five years to pay back,” she said.
The average loan size is about $500, but the biggest loan ever borrowed was $100,000.
In recent years, investments focused on promoting social change have increased substantially and are playing a major role in Kenya and other East African countries.
According to a recent report by the UK’s Department for International Development (DFID), the Global Impact Investing Network and Open Capital Advisors on impact investing, close to $10 billion in social investment funds have flooded into East Africa with Nairobi emerging as the collection point.
The report describes impact financiers or investors as those who invest with the purpose of generating a beneficial social or environmental impact alongside a financial return.
A report published in the Wall Street Journal last week indicates that impact or social investors regularly find themselves investing alongside firms that are purely driven by profit.
In Kenya and Uganda, for instance, Bridge International Academies, a chain of privately-owned, low-cost schools, boasts Microsoft founder, Bill Gates and Facebook founder Mark Zuckerberg as investors alongside the DFID impact fund.