PayPal-ing International Development

Benna Oboth is a widow in Tororo, Uganda, who cares for her eight children by buying cereal grain in bulk and selling it at the village market. Nearby, in the town of Soroti, Gregory Eliau takes care of five children -- left to him by his brother who died of AIDS -- by buying and selling cows. Elizabeth Omalla, a widow with seven children, is a fishmonger who gets her fish from Lake Victoria and sells to a middleman in town. She's hoping that soon she will be able to set up a shop of her own.

These three small business owners owe their success to Kiva (, a recently launched web-based non-profit that allows peer-to-peer (p2p) microloans. Kiva's p2p network enables ordinary people to loan small sums of money through PayPal to needy individuals without interference from a bank or microfinance institution (MFI). For the first time, anyone can make a loan of as little at $25 to an indigent entrepreneur in East Africa. In only a few weeks, the rapidly expanding website has facilitated enough microloans to fund over 30 businesses in Uganda, revolutionizing the concept of microcredit.

Making It Personal

Kiva co-founder Matthew Flannery was working as a filmmaker in Uganda in the spring of 2004, when he heard a story about a few Ugandan rice farmers who wanted to buy a truck to deliver rice to neighboring villages. "There are a lot of problems of distribution in Africa," Flannery told me. "Those rice farmers didn't want to sell their rice to an intermediary who would raise the price and give them less profit."

Flannery's wife, Jessica, was also in Uganda, working as a staff member for Village Enterprise Fund (VEF), an organization that provides seed capital to microentrepreneurs. Jessica put her husband in touch with Brian Lehnen, VEF's executive director, who said the Ugandan farmers had taken out a microloan through VEF and were repaying it steadily in increments of $50. Hoping to extend more microloans to rural African entrepreneurs, the Flannerys returned to the United States and tapped into the microfinance trend.

"I just noticed a huge surge in the popularity of microfinance among young liberal people right now," said Flannery, "and I wanted to get personally involved."

On Kiva's easily navigable site, interested lenders can click the Businesses tab and read about the ambitions of these microentrepreneurs. Through pictures and mini-biographies of each small business owner, lenders can learn how their microloans will be used and select their loan recipient.

For example, scrolling the active businesses, you can read about Simon Okiror, who has borrowed $500 to fund a medicine shop in Uganda.

Okiror lives with his wife and seven children in Soroti, where health centers simply don't have enough medical supplies for their ailing patients. After selling three goats he'd raised at home, Okiror was barely able to get his shop afloat. With his $500 loan through Kiva, Okiror has stocked his store with ample amounts of medicine for the community. In fact, his business has been so profitable that Okiror has already repaid $50 of his loan. All loans can be monitored on Kiva's site through a private account that a donor creates, and more than one donor can contribute to the same recipient.

A microhistory of microcredit

The concept of microloans, or microcredit, has been around since the mid-1970s, when ACCION International began issuing small loans to the indigent entrepreneurs of Recife, Brazil. ACCION was started in 1961 as a student-run non-profit aimed at relieving poverty in Latin American cities. By 1973, however, they realized that their efforts did not fully address the roots of urban poverty.

According to former ACCION director Terry Holcombe, "We began to sense that a school or a water system didn't necessarily have long-term impact. We were simply reorganizing the resources that a community already had within it, rather than increasing their resources."

Instead, ACCIÓN began funding microentrepreneurs -- mostly migrant workers who were unable to find work in urban areas and began selling wares or produce -- who until then had no alternative than to borrow from local loan sharks.

Meanwhile, Muhammad Yunus, an economics professor, ran a similar experiment in his native Bangladesh by lending money to people too poor to qualify for standard bank loans. Yunus' initial research project consisted of loaning $26 from his own pocket to 42 impoverished Bangladeshis (roughly 62 cents per person), which he found to be a highly successful way of fighting poverty in rural Third World areas. From what would seem like a token sum of money, these microentrepreneurs were able to launch their small businesses, eke out a living, and eventually repay their loans. In 1976, Yunus founded Grameen Bank, the first microcredit program based on the idea of sustainable self-employment for destitute Bangladeshis.

Grameen's clientele is broken up into groups of five borrowers who apply for loans together and serve as co-guarantors of responsible repayment. Interestingly, over 90 percent of Grameen borrowers are women. Grameen determined that women are lower credit risks than men; they are more likely to repay their loans in a timely fashion and spend their earnings on their families. Furthermore, microcredit allows these women to own assets and play decision-making roles in their communities.

Year of the micros

Microfinance has been so successful in recent years that the UN declared 2005 as the International Year of Microcredit. Why then, did Matthew Flannery feel the need to launch Kiva?

"Microfinance is expensive," Flannery said. "There's also a huge desire for it to be profitable. In almost no part of Africa has microfinance been profitable so far, and where we're working, there are no other microfinance institutions."

The Consultative Group to Assist the Poor recently estimated that there are approximately 750 million small-size savings and loan accounts with MFIs. Yet, while the potential market for microfinance could be up to 3 billion working-age adults, two-thirds of needy microentrepreneurs are not currently being reached.

Bruce MacDonald of ACCION explained the absence of MFIs in Africa. "The areas where microfinance institutions are profiting," he said, "tend to be in Latin America and Central America, where we've been operating for years."

The reason so few MFIs are currently functioning in Africa is because it is difficult and costly to develop new markets. Before an MFI can establish a lending program in a new geographical region, which includes providing borrowers with seed money and basic business skills, the MFI must first acquire charitable donations and investors.

"If you're going to get socially responsible investors to invest in a microfinance institution," MacDonald said, "you have to get them a return on their money." MacDonald feels that profitability is a legitimate concern because it enables an MFI to reach more people and extend its range of financial services. Currently, ACCION is in the process of expanding to Africa.

People over profits

By creating a p2p website for microlending, the Flannerys bypassed the painstaking process of creating a standard microfinance program. Since Kiva is privately funded by what Matthew Flannery calls "the rich guy network" in the San Francisco Bay Area and Silicon Valley, Kiva is not concerned with making profits. Instead, Kiva works within VEF's infrastructure in East Africa, relying upon Zadock Moses Onyango, a VEF volunteer field coordinator, to administer the loans and work with loan recipients.

Kiva has already made a huge splash in the blogosphere. After garnering attention from Daily Kos, WorldChanging and BoingBoing in recent weeks, Kiva was overwhelmed by potential donors. Last Friday, Kiva expanded to other African nations, including Kenya and Tanzania.

As Kiva's site has recently expanded, so too have the stories about their featured microentrepreneurs. On Kiva's weblog, Onyango and other VEF staff members chronicle the stories of individual borrowers.

With a few clicks, you can find someone like Agatha Kubena, a tailor from Dodoma, Tanzania, who received business training from VEF. Kubena is disabled, and wants to buy a sewing machine and the fabric necessary to make traditional African garments so that people in her community won't have to purchase foreign clothes. Like many of the personal accounts on Kiva, Kubena's experience will resonate with people everywhere who are struggling just to get by. As Flannery said, "I find the loan is often just a means of connecting to another person."


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