Wednesday, January 3, 2007

My 5th Kiva loan - Random Thoughts

  • Man... this is addictive! Is there such thing as KivAddication? Every time I go out for lunch, go shopping with the family and we spend $25, I think "hmmm.... I could just have funded a micro-enterprise in need with that!". That's a good thing, I hope???
  • I started seriously thinking about a diversification strategy. I really only want to invest in Latin American businesses, because that's where I feel closest to. So the issue is to distribute risk.
  • Talking about risk, with Kiva, I identified 3 levels of risk (and Kiva isn't too clear about 2 of them.)
    • First, there is the well-known risk of non-payment by the borrower. We all know that and take that risk with our eyes open.
    • Then, there is the risk caused by the stability of the MFI. If, for any reason the MFi goes out of business while the loan is being repayed, how will Kiva get their money back? How will the borrower continue repayment? I guess we'll be out of luck then... in other words, it may be wise to diversify your investments over multiple MFI's, especially if they're not huge and well-funded institutions
    • Last, there is the risk of Kiva going into receivership. Although I try really not to think about that one, it is a factor that should be considered. That risk is very small while Kiva continues to get funded (see for example this blog). and currently there is absolutely no reason to doubt that this will continue to be the case. But what will happen if new loans would ever start to decline, and thereby Kiva's source of income (your gifts and maybe future interest charged on loans to the MFI's) declines? There may be hundreds of thousands of dollars in outstanding loans if that would ever happen. And Kiva is not a bank, therefore you are not FDIC insured of something. I don't think you can do anything about this, except for monitoring Kiva's health as an enterprise and making sure that they don't go under by continuing to fund more loans!
  • Matt Flannery puts in a lot of thought into the statistics behind the loan patterns at Kiva. I think that one of the reasons for very quick funding of African loans is, in addition to all the reasons that are mentioned in his blog and its comments, that there is a language barrier for Latin American loans. Take for example this journal entry about Rosa Parra. You really need to speak Spanish to understand what is going on. Seen the number of recommendations it got, I'm glad to see that it was picked up by many people... (BTW-- that story is amazing and very sad--- if I were a lender to that loan, I'd have try to turn my loan into a gift, if at all possible)
  • Getting back to Matt's speculations, I'd definitely say that I started to check some basic metrics about a business before investing. That has made me a little bit wary of the large loans some Eastern-European/Near Asian borrowers are looking for. My main, completely subjective considerations include:
    • Can I imaging this business to be profitable?
    • Is the loan amount on par with the amount of revenue I think the business will generate?
    • Is the loan amount good to invest in the stated objectives?
    • Is the amount vs. revenue vs. payback period - ratio good enough? I mean, if you need 12-15 months to pay back a $400 loan, then there is something fundamentally wrong with your business plan...
    • How stable is the country? Do I know of some recent news event that may cause super-inflation during the repayment period? Will I lose my money because a coup-d'etat is about to happen, or local violence on the streets will cause my prospect-investment venture to have to close down for extended periods of time?
  • It is very good to know that quite some due diligence is done by the MFI. I've seen several businesses for which the loan fell through for a number of reasons, even though the Kiva community raised the money. See for example here and here. (Interestingly enough, also some of the borrowers back out of the financing even though they qualified...)

7 comments:

Anonymous said...

I view all kiva loans as permenant transfers from my funds, not as investments. If I get paid on most (as I expect) I will use them to make more loans.

Therefore I am not particularly concerned about being 100% or anywhere near 100% certain of repayment.

I view this as a very effective form of charity. Helping people who are trying to help themselves, through loans rather than outright gifts. Something like the parable,
about teaching someone to fish being able than giving someone a fish.


If some of the borrowers fail to succeed, and are unable to pay back the loan, so be it. If a few cheat the system, that will be unfortunate, but is a risk I am willing to take and view as a small factor weighted against the overall benefit of being able to help many.

If all my loans end up being repaid) that will be a bonus.

I am going into this expecting that 90% will be repaid, and would probably be disappointed if less than 75% are repaid,

Anyway I figure the people I am lending money to can use it more than the ultimate beneficiaries of my estate.

And I can do more good helping people thu this than most other things I can think of.

I view this as an investment, but not as a monetary one. I view this as an investment in helping make the world a better place.

Paul Sailer

Anonymous said...

God Bless you Paul Sailer. As a fellow Kiva lender, I could not have said it better.

If you're on the fence about lending through Kiva--just go give it a try.

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