Disintermediation and the Imagination

I suppose alumni/ae of microlending programs through Kiva's field partners have established a kind of local credit rating-- that's a start. And people who've been through the borrowing/repayment cycle several times are not likely to simply bolt, or to default casually.

But here's my problem... in the absence of a lending partner on the ground, the lender here in the rich world has no way to handle collections other than relying upon the borrower's conscientiousness. So unless you can figure out that piece, I think direct lending to individual borrowers isn't that likely to take off. You're still dependent upon the partner to provide that reputational capital you mention. (Unless Kiva could become the Experian of the microlending world, issuing "Kiva scores" instead of FICO scores?)

The only thing I think of to really engage direct lending would be some kind of "advanced borrower" program that Kiva could help some of its partners administer, where people who didn't need some of the other kinds of support provided by NGOs that microlend could still have loans publicized and get money. And then you lose visibility, unless you get into something like needing X number of high-Kiva-score borrowers to provide an endorsement or even to stake their rating on a borrower before he or she is allowed to post a loan on the Kiva Direct Borrowing program.

In fact, what's interesting about that is, kiva-scoring borrowers could actually give you some information that you "own" i.e. some value you bring to the microlending system beyond just more funding for loans. Of course, this would require reliable ways of identifying and tracking borrowers, making sure money is borrowed for the stated purpose (if you care about that), etc..

I think, though, that there's still plenty of good to be done doing the work you're already doing-- just scale the thing you have, then worry about new things later. Note that this isn't like business, in the sense that if Kiva gets competitors working in overlapping spaces, that's a good thing, until and unless we wind up with more money to be lent than there are borrowers.

An idea you mentioned is that MFIs can serve as a credit rater but not necessarily a loan administrator to graduated borrowers. MFIs will need to be compensated for this service so we will have to think about how to make it work financially for all parties.

The holy grail is to figure out how to do credit ratings without any institution involved, but like I said, that is a pipe dream.

Thanks for the comment

matt

KIVA has just opened an unofficial presence in Second Life. In January, I helped found the Non-Profit Global Network in Second Life. Sometimes it's the expense of connecting on-the-ground local information with the resources and intentions of donors and investors. A presence in Second Life could help connect the neighborly pastor, practitioners, NGOs, etc. -- these "critical connectors" -- with investors/donors.

I'm Dr. Leslie Jarmon / aka Bluewave Ogee in Second Life. I am involved in using Internet virtual world environments (Second Life) to complement and extend international development efforts. A growing number of non-profits are joining the growing number of corporations and educational institutions to leverage the powerful communication affordances of Second Life. Please contact me if you are interested. In the 80s, I served as Regional Coordinator of the Micro-Enterprise Development Initiative for Latin America and the Caribbean with the U.S. Peace Corps. I am a Senior Lecturer on the faculty at The Graduate School of the University of Texas at Austin. I have designed and taught graduate courses since 1998 here at the University of Texas at Austin's Professional Development & Community Engagement Program. In Fall 2007 I will teach a pilot graduate course held largely in Second Life called Communicating Across Disciplinary Cultures in Second Life. My research interests focus on Second Life and communication, technology, education, culture, and applications for developing countries. I also served three years as Community Outreach Officer for the Science, Technology, & Society Program at UT-Austin where I was Principle Designer of the Nanotechnology Civic Forum and of the "nano scenario" civic engagement model. I coordinate the Business Across Borders programs for the McCombs School of Business Plus Program. I am looking forward to working with anyone interested in exploring social entrepreneurship opportunities in Second Life. Contact email: LJarmon@mail.utexas.edu. In Second Life: Send IM to Bluewave Ogee (that's me). 512-232-3617. Office of Graduate Studies. The University of Texas at Austin. Austin, Texas USA.

Indeed, there are numerous examples of branchless banking underway in Kenya [M-PESA] and the Philippines [Globe, G-Cash]. Kiva should explore ways to sync portfolios with MFIs doing similar work. I'd be very keen to see Kiva add value here.

First off, this is an excellent summary of what it takes to make the system work and why it works.

One of the most dynamic speakers at TED Global last month, Herman Chinnery-Hesse, stated that he was trying to build the first carrier-agnostic and bank-agnostic mobile payments system for Africa. Imagine the possibilities if you could transfer money without worrying about specific banks or if the other person had the same phone carrier. That's a big statement, but it's coming from a guy with some serious street cred in African software circles. He also has the right idea, if he can execute on it, it'll blow everything away.

Now, even if he doesn't get this done, the precedents for mobile payments and a way of tying some kind of credit worthiness to accounts is feasible. When traditional banking, which is too expensive for the micro-entrepreneurs that Kiva deals with, fails - then the answer is non-traditional banking and payments. This is being done already through mobile services like those you mentioned.

As a former Prosper lender, I have just one piece of advice. Run, don’t walk, away from the Prosper model as fast as you can! It is not a pipe dream, it’s a nightmare! If Kiva ever attempts to adopt a Prosper-style of lending for microlending in developing countries, it will be the kiss of death to Kiva as we know it.

For starters, I have to take issue with all three points you make about Prosper. First, even though electronic transfers are involved, individuals do not lend to individuals on Prosper. Prosper lends to its borrowers. It acts as a hub and the “lenders” simply buy a piece of the action through competitive bidding. Second, the FICO scores displayed by Prosper for borrowers grossly underrepresent the actual default rates for each credit rating. To continue using the FICO credit grades along with the accompanying default rates, as if the same default rates should be expected for Prosper loans verges on the criminal. Third, collections on delinquent borrowers are abysmal. Payments on sales of defaulted loans are pennies to the dollar.

In addition, the groups system adds essentially no value to the lender. In virtually all cases, they add no useful information or increased likelihood of the loan being repaid. The primary benefit in most cases has been to act as a cash cow to the group leaders.

The overarching net result of the Prosper model is lenders are led to believe the risk of losing their investment is far less than the demonstrated reality of online P2P lending to strangers through Prosper actually is. Far too many lenders are learning this lesson by experiencing rampant delinquencies on the way to defaults, resulting in net losses from their initial capital investments. If the failures of Prosper are so prevalent with these so-called advantages of the US market, how in the World can this model be expanded beyond its borders?

If you still want to emulate a profit-driven online lending model, think more along the lines of Zopa. From the “lender” perspective, I see the basic difference between the two is Prosper manages one-to-one lending while Zopa manages one-to-many lending. Zopa does its due diligence on the loan applicants then groups them by risk and term. Then they let the bidding begin. The analogy I could see for Kiva would be to offer “MFI group loans.” Kiva could offer a larger amount (e.g., $5,000 increments) to a particular MFI for a specified time period. Kiva also would rate the risk of this loan using its five-star or similar system. The MFI then could lend this block of cash to several borrowers as they saw fit. Whether or not this type of loan to MFIs includes interest payments would up for discussion.

As far as Wizzit and related technologies go, cheer on the MFIs to adopt whatever helps them facilitate financial transactions with their borrowers in their unique contexts. They are the hubs in their settings, not Kiva. These technologies have tremendous potential to expand and streamline routine financial transactions. Unfortunately, they do nothing, IHMO, to reduce the risk of an inherently high-risk enterprise.

Richard:

I'm just now learning that people comment on my blog. I hadn't seen this post. I would like, if we can pull it off one day, to disintermediate as much as possible. There is a lot of upside to be gained by disintermediating, but a lot of risk as you well articulate. We're not necessarily as excited about the for-profit motive, more so the human connection motive. I don't have much prosper experience personally, so thanks for the feedback.

Stay in touch

matt