A new pilot program from microlending organization, Kiva, is providing small loans to entrepreneurs in the United States in order for them to start their own businesses.
The concept of offering low- or no-interest microloans to individuals in order for them to have the start-up capital available to create their own businesses–subsequently lifting them out of poverty–is not a new idea for those living in the developing world, but applying that model domestically is innovative.
Kiva’s new program, Kiva Zip, helps connect potential borrowers with local trustees that vouch for the borrower so that they have the opportunity to receive microloans. Once the borrower has been accepted for a loan, the funds must be raised. At this point, lenders from all over the world can log on to their Kiva Zip accounts, scroll through the various loans, learn about the businesses and the people behind them, and ultimately make a small loan.
Crowdfunding the loans in this manner is critical in order to find lenders for the loans. A lender in South Africa might fund a loan in Los Angeles, while a lender in Chicago might want to fund a loan locally. Connecting people who want to give back, with people that have the entrepreneurial spirit to lift themselves out of poverty, is what Kiva Zip is all about.
All Kiva Zip loans are repaid on a decided upon time schedule. The lenders receive their money back to either make another loan or withdraw their funds. The hope is that lenders continually reinvest their funds into new loans–making the model self-sufficient.
Kiva Zip’s guiding principles are clear:
1) Expand financial opportunities and access for borrowers who otherwise lack them
2) Reduce the cost of capital for borrowers who need it
3) Enhance the connectedness between lenders and borrowers
The Kiva Zip model differs from the Kiva model in two important ways. First, Kiva Zip disburses loans directly to the borrowers, while the Kiva model sends the funds to a third-party organization, usually a non-profit or NGO, who then disburses the loan amount to the borrower.
Secondly, because of the direct disbursement of loans to the borrowers, Kiva Zip loans are riskier than Kiva loans. The default rate on Kiva loans are very small–only one to two percent. The default rate on Kiva Zip loans are expected to be quite a bit higher, but as the model becomes more efficient, the default rate should decline.
Applying a proven principle, like microloans, to economic woes domestically makes all the sense in the world. After all, Muhammad Yunus, father of microfinancing, said it best, “Poverty is unnecessary.”
– Aaron Faust