Category Archives: microfinance

Fortune Magazine on Kiva

February 27, 2008 – 1:18 pm

If you read one article about philanthropy this month, make it “The only nonprofit that matters” in the new issue of Fortune. Click here to access. It is an excellent review of Kiva.org and other organizations of this type. I found a couple things interesting:

  1. Fortune refers to DonorsChoose as a “peer” of Kiva’s. When I suggested that DonorsChoose, Global Giving and others were competitors, Kiva denied this comparison. I think they are all more similar than different. Global Giving later wrote on their blog that they agreed with my take.
  2. The article notes that DonorsChoose users can elect to send a portion of their gift to DonorsChoose to cover overhead rather than have 100% go to the project. They say 90% of users choose this option. When I suggested that Kiva use a similar pricing mechanism to fix their current supply/demand imbalance, Flannery said (scroll to bottom) that the 100% going to the project was a critical part of Kiva’s value proposition.
  3. Kiva has been criticized for not being “real philanthropy”, because users make loans not gifts. I think Kiva is so important because they’ve figured out how to give users both hard data (default rates on loans) and soft data (info directly from the borrower to the lender on how they’re doing. In the article Flannery says, “We think the users want information more than they want their money back.”

In case anyone is new to this discussion, I want to make it clear that I think Kiva is doing great work. I make the above points because I think that the philanthropy community should care deeply about Kiva’s decisions because I think they are creating a model that will find huge success.

You can read my prior thoughts on this issue here.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropic Capital Markets, Philanthropy, Transparency | Comments (0)

Best of Stanford Social Innovation Review

February 16, 2008 – 10:58 pm

The Stanford Social Innovation Review is a must read if you care about philanthropy. They manage to straddle the line between offering academic journal type articles while at the same time offering up compelling, engaging writing. They even play host to a large group of philanthropy bloggers (including me).

You have to subscribe to the magazine to read most of the articles. But the SSIR is currently offering their five most read articles of 2007 for free:

Creating High-Impact Nonprofits

Conventional wisdom says that scaling social innovation starts with strengthening internal management capabilities. This study of 12 high-impact nonprofits, however, shows that real social change happens when organizations go outside their own walls and find creative ways to enlist the help of others.

Microfinance Misses Its Mark

Despite the hoopla over microfinance, it doesn’t cure poverty. But stable jobs do. If societies are serious about helping the poorest of the poor, they should stop investing in microfinance and start supporting large, labor-intensive industries. At the same time, governments must hold up their end of the deal, for market-based solutions will never be enough.

How Nonprofits Get Really Big

Since 1970, more than 200,000 nonprofits have opened in the U.S., but only 144 of them have reached $50 million in annual revenue. Most of the members of this elite group got big by doing two things. They raised the bulk of their money from a single type of funder such as corporations or government—and not, as conventional wisdom would recommend, by going after diverse sources of funding. Just as importantly, these nonprofits created professional organizations that were tailored to the needs of their primary funding sources.

Social Entrepreneurship: The Case for Definition

Social entrepreneurship is attracting growing amounts of talent, money, and attention. But along with its increasing popularity has come less certainty about what exactly a social entrepreneur is and does. As a result, all sorts of activities are now being called social entrepreneurship. Some say that a more inclusive term is all for the good, but the authors argue that it’s time for a more rigorous definition.

A New Era for Business

More and more business leaders recognize that their company’s future is increasingly intertwined with the needs and demands of society. What many executives don’t understand is how best to manage that changing relationship. In this article, McKinsey & Company consultants provide a model for incorporating sociopolitical issues into the strategic decision-making process.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Impact Measurement, Media, Philanthropy, Social Entrepreneurship | Comments (0)

A Kiva User Responds

February 11, 2008 – 6:46 pm

Danielle Hamilton, A Kiva user who has been commenting on their “sold out” status recently left the following comment:

For the long term, I hope they expedite their research process,
streamlining their review system, allowing more researchers to be
available, thereby increasing the amount of borrowers. This seems to be
the hold-up, so to speak.

As for the ‘exclusivity’ of the service, I could care less for the
cool factor, whether Bill Clinton has mentioned it, or that it was
featured on Oprah. I do care that they have an excellent review
process, amazing repayment stats, excellent collection rates, and
regularly updated business bios to let me know the status of the loan
and repayment schedule. I receive regular e-mails updating me on the
repayments, which prompts me to browse the site again, finding other
businesses that need help.

It’s frustrating to see other blogs & newspapers compare Kiva to
GlobalGiving or other donation sites, trying to capitalize on Kiva’s
success in the MicroFinance realm. These are completely different! I’m
not giving a donation through Kiva. It’s a loan that will be repaid,
and I can plug my $25 back into another business. It’s comparable to
the Grameen Bank, on a smaller scale. If I wanted to give a donation, I
could do that with thousands of other websites and nonprofits,
including the 2,000+ nonprofits that I currently work with. (Note:
There ARE currently 5 opportunities for MF through GlovalGiving, but it
is obviously NOT their main focus.)

~Danielle
http://www.HumaneFundraising.com

In a separate comment she writes:

I feel that I’ve had more contact about my loan through Kiva than I’ve
had from dozens of nonprofits that I’ve supported over the years.

I think that’s a telling comment as to why Kiva has been so successful. In a world where donors get limited feedback on the impact their are having, it is thrilling to hear real feedback from the borrower.

Danielle also complains about comparing Kiva to Global Giving (I had suggested that Kiva could refer donor/lenders to other “social exchanges”). Clearly lending is different from charitable giving. Yet in the financial markets debt investments (bonds) do compete for investor dollars with equity investments (stocks). My point is that as we see more social exchanges developed, they may want to broker agreements to send donors to each other when they can’t execute a transaction (a similar concept is already in place with stock

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropic Capital Markets, Philanthropy | Comments (0)

Kiva’s Supply & Demand “Problem”

February 8, 2008 – 9:45 am

Recently, Peter Panepento, a reporter for the Chronicle of Philanthropy wrote about my Kiva brainstorming on the Give & Take blog:

The founder of Kiva, a charity that encourages donors to make loans to needy entrepreneurs, took questions about his organization’s supply-demand dilemma during Tuesday’s weekly Chronicle online discussion.

And one of the most pointed questions came from Sean Stannard-Stocton, a financial consultant and the author of Tactical Philanthropy, who suggested that the organization change its lending terms to direct less money to the recipients of its small-business loans.

Mr. Stannard-Stockton suggested that Kiva should keep 10 percent of the pledged money as a contribution. That money would then be used to build a support staff that can identify more potential loan recipients.

Peter is an excellent reporter and someone I like personally very much. But I think the quote above mischaracterizes my position on Kiva. Here’s my thoughts on Kiva:

Kiva has a supply & demand imbalance. This is a new type of problem because historically the nonprofit/philanthropy world has not used exchanges and market based model to distribute aid. I’m intrigued by the implications of the imbalance and the precedent that Kiva will set by how they respond to the imbalance.

As reader Phil Steinmeyer points out (as does David from Ashoka), the imbalance may not be a problem but actually a huge positive. Steinmeyer writes:

I can see two sides to this:

1) If the supply/demand situation is unbalanced LONG term, then yes, they should put more effort into ways to balance things. Flannery’s response seems based on the idea that they have an excess demand (donors) much greater than 110% or so of supply (projects). But the value of taking a 10% slice for Kiva itself is NOT so much in reducing demand by 10%, but rather, in using that money to hire staff and increase supply.

2) On the other hand, if the surge in donors is temporary, it may be undesirable to change the terms. Look at the Wii - the hot video game system of the moment. It is priced at ~$250, and has been largely sold out almost since it’s release over a year ago. But part of the reason why it has been so popular was it’s attractive pricing relative to other systems (especially the PS3). If Nintendo raised the price, they could bring things into balance in the short term, but might hurt themselves long term, by losing the ‘low price’ vibe they have going.

Nonprofits are use to operating in environments where they have to chase funders, but social capital markets set up a situation where donors must compete to fund nonprofits as well. By being “sold out”, Kiva may be creating a situation where they are increasing their chances of long term success (would you rather go to a restaurant where there was always an open table or one where you had to make a reservation months in advance? Without any other information, which restaurant do you assume is better?).

But let’s assume for the moment, that the most good can be achieved if Kiva’s supply and demand is in balance long term (most markets achieve stability over time, even if in the short run they are imbalanced). My point is that the best way to balance supply and demand is to have “prices” adjust rather than by putting caps on how much supply or demand is allowed in to the system.

In response to my question, Flannery wrote:

Your idea of only sending 90% of lender money to entrepreneurs would save us 10%, which wouldn’t get us that far. Our supply/demand disequilibrium is much greater than that. Secondly, it breaks the purity of our p2p (peer-to-peer) intentions. It’s really powerful to say “100% of your loan goes to the entrepreneur” and that’s something we are not going to back away from as long as I’m here.

First I’d like to say that I agree with Matt’s point of the power of “100% goes to the entrepreneur.” But he’s missed the point of my suggestion (which is offered as a way of brainstorming, not a recommendation because I’m not in a position to second guess Matt, he understands microfinance far better than me). What I suggested was:

Another way to balance supply and demand would be to reduce the lending terms (for instance lenders only get 90% payback of their loan back with the other portion being a gift to Kiva or to someone else in your financial chain).

I’m focused on what does the lender “pay” for the transaction of working with Kiva? Currently, they pay nothing. They get all their money back, but they forego the interest they would make in a normal loan, so they do have an opportunity cost from lending through Kiva. What if they were paid negative 5% interest? We already know lenders will over supply the market at a 0% interest rate. Might some lenders be willing to accept a negative rate for the “privilege” of engaging with Kiva? Market theory suggests they would, but we don’t know how it would affect demand. Giving lenders a 90% payback would not reduce demand 10% has Flannery implies. Under this concept, you’d have to believe that a 0% payback would result in no lenders, but we know that many people do in fact accept a 0% payback (ie. a donation). Supply and demand changes with price along a curve and the slope of that curve determines how much the supply and demand changes. If the price of gasoline doubles, would you drive half as much? History shows us that demand for gas is “inelastic”, meaning that it does not change much as the price changes. What if the price of store brand cola doubled? Since it would cost more than Coke or Pepsi, demand would probably fall to zero. This is an example of a highly elastic demand curve.

We don’t know the elasticity of supply for Kiva. But I hope they experiment and find out.

Also, both Flannery and Panepento assume that anything not paid back to the lender would go to Kiva. When money is lent through Kiva, it is lent to a microlender who then lends the money (and charges interest) to the actual borrower. If the donor/lender accepted a negative interest rate, the savings could accrue to Kiva, the middleman or the final borrower. My focus is on the “price” charged to the donor/lender and how this will affect supply.

Lastly, let me stipulate again that all of this is just brainstorming. A lot of assumptions have to be made because we do not have much historical experience with social capital markets. For instance, a closer look at Steinmeyer’s example of the demand for Wii systems and the relevance to Kiva suggests that maybe Kiva lenders are not “supply” at all, but in fact are “buyers” of a luxury product. Maybe Kiva is selling “good” and lenders are buying it.

It can be a Looking-Glass world sometimes.  But that makes this all the more interesting.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropic Capital Markets, Philanthropy | Comments (0)

Matt Flannery Responds

February 5, 2008 – 12:18 pm

My Q&A with Matt Flannery of Kiva from today’s online discussion on the Chronicle of Philanthropy website:

Question from Sean Stannard-Stockton, Tactical Philanthropy Blog:

As I think you know, I’ve been blogging about the implications of your “excess” supply of lenders at Kiva. You have chosen to tell would be lenders that you there are no current funding opportunities. I’m intrigued by the notion that another way to balance supply and demand would be to reduce the lending terms (for instance lenders only get 90% payback of their loan back with the other portion being a gift to Kiva or to someone else in your financial chain). I’m not suggesting you take this action because I do not know your business well enough. But I do believe that you are facing an issue that many other social capital “exchanges” will be facing in the future and that your actions on this issue will set a precedent. I’d love to hear your thoughts.

Matt Flannery:

Thanks for your suggestion. Currently, here is our strategy in times of excess lenders:

– Softly cap individual donations at $25, and ask users to reduce individual spending so that others can participate.

– When the site runs out completely, ask for donations to Kiva so that we can hire more people, sign up more partners and get more entrepreneurs posted on the site.

Your idea of only sending 90% of lender money to entrepreneurs would save us 10%, which wouldn’t get us that far. Our supply/demand disequilibrium is much greater than that. Secondly, it breaks the purity of our p2p (peer-to-peer) intentions. It’s really powerful to say “100% of your loan goes to the entrepreneur” and that’s something we are not going to back away from as long as I’m here.

It must come across as kind of obnoxious to have someone (me) who is no expert in microfinance suggest a change to Kiva’s business model. I don’t think I know any better than Matt does on this issue. But the long history of markets shows that supply and demand is best reconciled through changes in price rather than through artificial caps. My idea of changing the terms of the loan would in effect be a pricing change. But Matt makes a very important point when he talks about the  “100% of your loan goes to the entrepreneur” image of the organization.

Here’s my take. These social capital markets belong to the public. As we shift towards a social capital market, it is important that those people with a vested interest in the outcome speak up and make their voice heard. As a member of the public, we are all “shareholders” in the social capital markets and the organizations that are creating them. I look forward to following Kiva’s progress.

By Sean Stannard-Stockton | Also posted in Philanthropic Capital Markets, Philanthropy, Social Media | Comments (2)

GlobalGiving Weighs in on Kiva Issues

February 5, 2008 – 8:21 am

Writing on the GlobalGoodness blog, GlobalGiving co-founder Dennis Whittle quotes my recent post on Kiva.org and adds his own thoughts:

In the financial markets, there are rules that if a particular exchange is unable to execute an order, they must route that order to a competing exchange immediately.

This is from a nice blog post by Sean Stannard-Stockton. He points out that in the nascent philanthropic financial markets, there is no obligation to re-route donors to another philanthropic exchange under similar circumstances.

At GlobalGiving, we have informal agreements with a number of other exchanges, and we do refer donors to partners when it makes sense. This helps us meet our pledge to donors that they will be satisfied with their experience at GlobalGiving. It also helps our partners grow, and it generates goodwill for all involved, which pays off over the long term.

Together with a loose coalition of other philanthropic exchanges from around the world, we have been exploring whether it makes sense to develop a formal inter-operability framework. This framework might include common standards and the ability to automatically fulfill donations referred by other exchanges.

Sean is right: making the non-profit social capital market more effective means that this type of collaboration needs to be accelerated.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, New Philanthropy, Philanthropic Capital Markets, Philanthropy | Comments (2)

Kiva.org Responds

February 4, 2008 – 9:53 pm

Fiona Ramsey, Kiva’s director of public relations responds to my post speculating on the implications of Kiva turning donor/investors away for lack of available borrowers to fund. Tomorrow at noon eastern, Kiva co-founder Matt Flannery will be in a live discussion on the Chronicle of Philanthropy website. I’ll post a follow up to Fiona’s comments after participating in Matt’s discussion. Just to be clear, I think Kiva is a fascinating, innovative model. I think the issue they currently face does not speak poorly of them in anyway, but I do think that the issue brings up complicated new issues that the social capital markets will have to deal with over time.

Sean:

It’s exciting for me, as Kiva.org Public Relations Director, to read your comments about one of the most intriguing parts of Kiva’s model. I agree with your comment that “Kiva?s problems are a great example of how strongly donors respond when social capital markets are created” - which is an exciting indication of how far lenders/investors will take this!

A couple points of clarification:

Kiva.org does not consider DonorsChoose.org or GlobalGiving.org to be competitors. While these models are similar in that individuals can choose the specific project they would like to contribute to, they are donations, not loans, and Kiva only facilitates loans at this time.

One element of the Kiva model that is often under appreciated is that the platform operates 24/7, so a “shortage” that exists at one time, may not exist a matter of hours later. Kiva’s Field Partners update loans for funding from the developing world as they are received, they are translated and submitted to the live site as quickly as possible. So, we can literally have a site with no funding needs one minute, and thousands of dollars with of funding needed minutes later. This is the beauty of the Kiva platform - needs being delivered from the developing world. Real-time, real people and real needs.

Of course the flip side is that a potential lender can come to the site and not find any lending opportunities at that time. However, that’s what makes the site so “addictive” for many lenders. Because you don’t know what needs will be listed an hour later, and find yourself checking back hours later to get an update.

One additional comment: there is not a shortage of people in need of a loan. What there is, is a bottle-neck. Kiva.org undertakes a significant due diligence before partnering with any microfinance institution, and it takes time to both satisfy Kiva.org’s due diligence and train MFI staff on the Kiva system. As such, the Kiva.org partner portfolio is not growing at the rate of our lender community. The other solution to building our partner portfolio is to increase the amount of funding each partner can raise (each partner has a monthly fundraising limit), but that simply wouldn’t be responsible. Kiva.org is committed to creating an online microlending platform that helps MFIs to scale only at a rate that is healthy for both the MFI and Kiva.org.

On a personal note, watching these “shortages” occur excites me because it sends a strong message to our Field Partners, that Kiva Lenders believe in their work and wish to support their programs, and to developing world entrepreneurs, that Kiva Lenders are supporting them from over 70 countries in the world, and want to give them a chance to be successful entrepreneurs.
As you said, Sean, this is a “great example of how strongly donors respond when social capital markets are created.”

Fiona Ramsey
Public Relations Director
Kiva.org

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropic Capital Markets, Philanthropic Technology, Philanthropy, nptech | Comments (4)

Kiva.org & The Social Capital Markets II

January 31, 2008 – 6:36 pm

The New York Times recently reported on the fact that Kiva.org has too much money from donors/investors and not enough people to give/lend the money to:

Over the last few months, some visitors to the Web site of Kiva, a nonprofit that lets users make interest-free “microloans” to entrepreneurs in low-development (that is, poor) countries all over the world, were greeted with a surprising message. “Thanks Kiva Lenders!” it began. “You’ve funded EVERY business on the site!!” Has a charity ever announced that it had enough money? Would-be lenders were dumbstruck, says Kiva’s public-relations director, Fiona Ramsey: “They’re stunned for a second — ‘Here I am, I have money, I want to help someone, and you’re telling me that I can’t?’ ” The note encouraged the visitor to check back soon, as a new batch of loan-seeking entrepreneurs will often appear mere minutes later. But still, Kiva is a philanthropic organization facing an extremely unusual challenge: maintaining adequate supply (people who need help) to meet demand (people who want to give it). “We don’t want people coming to the Web site who want to make a loan and there’s no one to loan to,” Ramsey says.

On Saturday, the newest edition of my column in the Financial Times comes out and in it, I feature Kiva.org, DonorsChoose.org, and GlobalGiving.org as examples of “websites have sprung up that seek to match donors with nonprofits and projects that match their unique outlook.” These sites are examples of the growing social capital market that I believe will make it easier for donor/investors to find projects to fund and projects to find funders.

I’m intrigued by the implications of Kiva’s problem (and yes, getting too much money is a problem for a nonprofit, especially if they are unable to put the money to an effective use). For instance:

  • Kiva and the other sites I mention above have different missions. But would Kiva’s mission be better served by refusing donor money or by pointing donors to these other sites?
  • Is Kiva’s mission better served by treating these other sites as competitors and not referring donors to them with the premise that Kiva can best further their own mission and therefore should hope the donors will come back later if they do not give the money first to another site?
  • In the financial markets, there are rules that if a particular exchange is unable to execute an order, they must route that order to a competing exchange immediately. Does Kiva have a similar obligation to “re-route” their clients order to another “exchange”?
  • While Kiva is different from most nonprofits, it is still striking to hear about a nonprofit organization turning donors away. Does this problem stem from Kiva’s failure to identify “demand” (people to lend the money to) or from Kiva’s success at attracting “supply” (the lenders)? If the issue is on the demand side, does this suggest that microfinance cannot address as large as a market as proponents believe? If the problem is on the supply side, does this mean that we can expect Americans to provide much higher levels of support to the social capital markets if we can find more effective ways to engage them (as Kiva has)?
  • Rather than turning people away, Kiva could change the terms of their loans so that rather than getting full payback (Kiva loans do not carry interest), only 90% of the loan is paid back. This would then make the excess supply a benefit to the borrowers. Weaker terms for the lender would drive some lenders away and bring the market back into balance through reducing supply rather than increasing demand. Is this a better idea than refusing new money? If so, better for who?
By Sean Stannard-Stockton | Also posted in Effective Giving, Fundraising, New Philanthropy, Philanthropic Capital Markets, Philanthropy | Comments (3)

Kiva.org and the Social Capital Markets

January 30, 2008 – 10:29 am

The NY Times recently wrote about how Kiva.org has a supply/demand problem. Too many donors, not enough people to give the money to. Caroline Heine on PhilanthroMedia writes today , “the inability of Kiva.org to keep pace with its own success is just one more example of the problems caused by the absence of a “true” social capital marketplace.”

I think Kiva’s problems are a great example of how strongly donors respond when social capital markets are created. I believe figuring out how to connect donors and nonprofits via marketplaces will result in temporary supply/demand imbalances. This is a normal reaction to creating liquidity in a market that did not have it before.

Grameen, the microfinance organization founded by noble peace prize winner Muhammad Yunus opened offices in Queens, NY recently. Kiva’s problem is not that there are too few people in the world who need microfinance, but that they’ve turned on the supply spigot and need to figure out how to turn on the demand spigot.

By Sean Stannard-Stockton | Also posted in Philanthropic Capital Markets, Philanthropy | Comments (7)