The United States Congress anointed banks as the official gatekeepers of the financial system. As the kings (usually men) of finance, the banks’ competitive advantage is codified into the economic structure. By leveraging their deposits, banks can create money, and lend it out—what amounts to a license to make money. When banks need money quickly, they borrow from other banks, or from the Federal Reserve (the nation’s central bank), at rates much lower than the general public can get. During the throes of the Great Recession, some banks proved that they were too big to fail, forcing the government to intervene to prevent them from failing.
So, it’s not surprising that in this system, the five largest banks (JP Morgan Chase, Bank of America, Wells Fargo, Citibank and U.S Bank) control 45 percent, or almost $7 trillion, in bank assets. The remaining 6,500 American banks control 55 percent. That’s a huge concentration of wealth and power in the hands of a few bank CEOs. Their status ensures they have money to lobby Congress for rules that promote and protect their interests.
Change the System
Inequity is spreading in the United States and around the world. For example, in 2014, PBS News Hour reported that the wealthiest 20 percent controlled almost 95 percent of global wealth, which leaves only 5 percent for 80 percent of the world. This is a red flag. Experts predict it will get worse in the years to come.
The top one percent is expected to control 50 percent of global wealth. Inequity is having a profound impact in the United States, where the rich use their wealth to promote their interests at all levels of government – municipal, state and federal.
There is hope in the form of nonprofits to provide a more equitable system for the masses. Charitable, educational, and religious organizations are thousands of years old, and come in all sizes. For instance, the Roman Catholic church is rooted in the teachings of Jesus Christ in the 1st century AD. Harvard College was founded in colonial times.
The collective sector of nonprofit organizations in the United States dates back to the 1970s, according to Peter Dobkin Hall, who wrote Historical Perspectives on Nonprofit Organizations. The majority of nonprofits were organized after 1950. Nonprofits and nongovernmental organizations (NGOs) “are the most rapidly growing organizations in the world,” states Hall.
The National Center for Charitable Statistics reports that there are over 1.5 million nonprofits in the United States. Nonprofits exist for a purpose other than making a profit. The money they make is used to serve their mission. These nonprofits are at the forefront of social change.
Nonprofits are a hybrid between a business and a social cause. They are mission-driven organizations. Society recognizes this public benefit and under the IRS code, 501 (c) 3, nonprofits can receive donations that are tax-deductible, and do not pay sales and property taxes, or federal income taxes. The Urban Institute reported in “The Nonprofit Sector in Brief 2015,” that the sector generated about $906 billion for the U.S. economy in 2013, which was approximately 5.4 percent of the gross domestic product (GDP) that year. Total giving from individuals, businesses and foundations was $358 billion.
A Common Purpose
Kiva, an international nonprofit organization created in 2005, seeks to make a difference in the lives of people around the world. It operates in 82 countries and its website states, “We envision a world where all people hold the power to create opportunity for themselves and others.”
Kiva is a microfinance, peer-to-peer lending platform. Every dollar loaned goes to borrowers—that’s 100 percent. Kiva provides loans in many categories, such as agriculture, arts, conflict zones, food, green (good for the environment), health, shelter, single parents, social enterprise, small business, transport, water and sanitation, women, and more.
Its United States arm is Kiva U.S., which facilitates lenders to contribute to small businesses. While not a lender, it is a platform to connect lenders and would-be borrowers—it’s Match.com for microfinance. It was formerly known as Kiva Zip, when the pilot launched in 2011, and was integrated into the Kiva.org website in June 2016.
Kiva U.S. serves an underserved population that is disregarded by the traditional finance system. To get around the credit moat traditional lenders have built using standardized underwriting, Kiva evaluates what it calls social capital to include a person’s reputation and value to the community. A radical approach to underwriting. They call it social underwriting.
Kiva U.S. provides small-business loans up to $10,000 at zero percent interest (not a misprint) with monthly repayment terms varying from 6 to 36 months. To qualify for a loan, you must be 18 years or older, be a small-business owner in the United States, have a verified PayPal account, and not currently be in bankruptcy.
Rideshare drivers, personal loans, and multi-level marketing firms don’t qualify. Lenders around the world make their own decisions whether to lend. The decision-making process comes down to a match between the lenders’ and borrower’s interest. Each project has a profile with the pertinent information, including pictures and a description of the project. Some Kiva U.S. loans are endorsed by a Kiva Trustee, an official sponsor of a project approved by Kiva. But a trustee is not a prerequisite.
Bangladesh Scales Microfinance
Kiva emphasizes character-based underwriting, which was pioneered by Professor Muhammad Yunus, the Nobel Peace Prize winner in 2006, an honor that he shared with the Grameen Bank. Professor Yunus is the founder of the Grameen Bank, created in 1983 to provide small loans (micro-credit) to poor people.
The bank is a vehicle to fight poverty in Bangladesh, one of the poorest and most densely populated countries in the world. The Asian Development bank reports that almost 32 percent of the country lives below the national poverty line (which is equivalent to $2 per day in U.S. currency). Professor Yunus is known as the banker to the poorest of the poor because his bank eliminated the need for collateral and based decisions on “mutual trust, accountability, participation and creativity”, according to the Grameen Bank’s website.
The Nobel Peace Prize website states that the motivation for the award to Professor Yunus and the Grameen Bank was “for their efforts to create economic and social development from below.” Professor Yunus’ model was the beginning of social underwriting, where the crowd knows better than one individual or organization. The results have been nothing short of impressive. Of the 8.81 million borrowers in Bangladesh, 97 percent are women, and 97% of the loans are paid back. The bank has 2,568 branches and services 81,392 villages, reaching a large percentage of the country.
Kiva is Different.
Kiva is a sea change that has brought people and technology together. The Silicon Valley crowd may call it disruption of the banking system by a fintech (technology company focused on the finance space). At the same time, Americans want more say in the financial system and how their funds are used.
In the traditional finance model, banks make all the decisions. But with crowdfunding on the Internet, anyone can contribute small-dollar amounts of capital. Companies such as Kickstarter and Indiegogo have proven this model can work, to the tune of billions of dollars raised across the world. This paradigm shift is here to stay. Today you’re a borrower, tomorrow a lender.
The conventional banking model charges fees and interest for its lending activities, with the goal to make a profit. Banks emphasize assets and size, a model that more and more lacks a human touch. Kiva is in the business of helping people help themselves. It’s fundamentally different from the make-as-much-money, get-as-big-as-you-can while keeping costs down ethos of banking. Both models coexist, but Kiva’s philosophy captures the zeitgeist of a new generation. In the end, it comes down to what your interest is: making money or serving people.
From Credit to Social Capital
Kiva understands that your credit score shouldn’t determine whether you get a loan, which is not how banks see it. In fact, Kiva doesn’t require a minimum credit score. It believes in character and knows that your credit score is not the be-all when it comes to evaluating risk. “I think we are doing something revolutionary when it comes to underwriting loans. We are really trying to look at a borrower’s character, and their standing in the community, rather than a credit score”, said Jonny Price, senior director, Kiva U.S. A model based on social underwriting and social capital.
Kiva’s website reads, “We’re reinserting human relationship into our financial system.” The largest banks underwrite for efficiency and to keep costs down, while Kiva’s underwriting is skewed toward maximum distribution of capital to the masses. Jonny Price mentions, “We believe that small business owners are more than their credit score.” Kiva’s model doesn’t build a wall around capital; it lets it flow to where it is needed.
Kiva’s underwriting process looks at social capital, the glue that bonds people and communities together. Social capital has been studied by the Harvard Kennedy School, which produced the Saguaro Seminar. The goal of the seminar is to increase Americans’ connectedness.
The premise of social capital is that networks have value that leads to “trust, reciprocity, information, and cooperation associated with social networks,” according to the Kennedy School’s website. Social capital develops value for both an individual and others who are connected to the same network. If a borrower doesn’t repay her loan, she may be ostracized from her network with long-term repercussions.
Jonny Price says, “We don’t have a minimum FICO credit score. We don’t take any collateral.” On the other hand, Kiva U.S. does perform due diligence to confirm identities. If you meet the requirements, your profile is posted online for initial contributions only from family and friends. Once you meet a certain threshold of contributions from your internal network, your profile goes live to all Kiva lenders. According to Jonny, 20 percent of projects are funded by family and friends and 80 percent by Kiva’s lenders. Your funding campaign must meet its posted capital goal or you don’t get any of the funds—it’s an all-or-nothing approach.
Kiva requires lenders to contribute a minimum of $25. Don’t underestimate the power of small numbers to make a big difference. Look at Apple’s iTunes, where consumers have downloaded billions of songs that retail as low as 69 cents up to a maximum of $1.29. In Q1 2017, Apple reported that iTunes software and services generated 7.17 billion in revenue—certainly not small potatoes.
Stories on the Kiva website help lenders and borrowers to connect. Kiva has proven their model works and that the social network is the key to funding and repayment. Jonny Price states there are three reason to choose Kiva U.S.: 1) The majority of projects are funded. 2) Kiva makes it easy to source capital. 3) Roughly 80 percent of the funds come from the Kiva network and only 20 percent from the borrower’s network.
As of February 18, 2017, Kiva U.S. has funded 3,000 loans for a total for $16.5 million from 125,000 lenders. The average number of Kiva U.S. lenders is 100 per deal and $6,500 is the average loan size, with a repayment rate of 84 percent.
Kiva’s global results are impressive: $942.6 million loaned from 1.6 million lenders to 2.3 million borrowers. Kiva reports that 90 percent of live deals are funded, a much higher rate than Kickstarter. An important stat in fighting inequality is that 81 percent of Kiva borrowers are women. From start to finish, it takes roughly six weeks to raise the capital. Overall, Kiva’s repayment rate is 97.1 percent.
Jonny has three goals for Kiva U.S. in the future: 1) Keep growing in the U.S. 2) Take the direct-lending model pioneered on Kiva U.S. to every country in the world. 3) Reimagine the financial system based on people, not on profits, by reinserting human connections and personal relationships into our financial system. Kiva’s model has the potential to bring capital to every person (especially women) on the planet, provided they have access to the Internet and a social network.
If you’re looking for capital, make sure your interests align with those of the lenders. This can make a difference in creating a world that provides low-cost access to capital, or one that perpetuates inequalities. It’s your choice.
Note: Jonny Price is not related to the author.
Anthony Price is the CEO of LootScout, which counsels small businesses how to raise capital. Follow him on Twitter @LootScout.com.