Microloans to Entrepreneurs: Kiva Claims Success in US Despite Controversy

When Kiva created a system to encourage lending to entrepreneurs, small businesses worldwide took notice. However, until last year, U.S. entrepreneurs were unable to participate. 

Now after a successful pilot program which began in June 2009, Kiva.org now offers small business loans, or "microloans" to U.S. entrepreneurs. FindLaw's Free Enterprise blog noted at the time that other microlenders were under investigation by the SEC, as their loans could be classified as securities.

However, it seems that many of the fears have been put to rest. Individual lenders do not make interest, which allowed Kiva to stay clear of the SEC. That has not kept Kiva completely from criticism however. Last week, Neil MacFarquhar of the New York Times analyzed the microfinance industry, asserting that it is overrun by big banks, with some charging interest rates of 100 percent or more.

At Kiva, which promises on its Web site that it "will not partner with an organization that charges exorbitant interest rates," the interest rate and fees for LAPO [a Nigerian microfinance institution with which Kiva has partnered] was recently advertised as 57 percent, the average rate from 2007. After The Times called to inquire, Kiva changed it to 83 percent.

However, as Elisabeth Rhyne countered in the Huffington Post:

Yes, interest rates on microloans are higher than on conventional loans, but the trend is actually down, not up. For the past decade average rates around the world have been falling....Second, it is not the so-called banking giants that dominate the field. The players making the biggest impact are dedicated microfinance institutions (MFIs) that started out as non-profits with a strong social mission and become regulated financial institutions or banks so they could scale up to carry their mission to more people.

Kiva, headquartered in San Francisco, was inspired by Nobel Peace Prize winner Grameen Bank of Bangladesh and its founder Muhammad Yunus. Kiva's mission is to connect people, through lending, for the sake of alleviating poverty. Over 585,000 people have loaned more than $100 million to 249,000 entrepreneurs in 49 countries. On average, loans made through Kiva.org have a 98% repayment rate.

Related Resources:

• Banks Making Big Profits From Tiny Loans (NYTimes.com)
• Worldwide micro-lender looks homeward: Q&A with Kiva.org's Premal Shah (SF Public Press)
• Peer-to-Peer Lending: Problems and Promise (BusinessWeek)
• Start-Up Financing (FindLaw)
• Kiva Brings Microlending Home To U.S. Entrepreneurs In Need (Techcrunch)