The Story Behind Kiva.org

by Nathaniel Whittemore

category: Nonprofit vs For Profit

Published May 23, 2009 @ 07:46PM PT

(via liewcf)

Online microlending marketplace Kiva.org is, for good reason, one of the most talked about social benefit organizations in the world. Since 2005, it has given average people the chance to loan small amounts to micro-entrepeneurs around the world. The total loan volume has surpassed $66 million, with a 97% repayment rate. Loans are often filled within just a few hours. At times of particularly heavy traffic, Kiva caps any one individual's donations to $25 to give more lenders the chance to participate.

Yet occaisionally, Kiva's runaway success has lured other nonprofits to copy pieces of their model without precisely understanding how all of the pieces came together to make such a powerful proposition for all stakeholders involved. In one of my favorite posts on the topic, "Kiva Is A Menace," nonprofit consultant Curtis Chang wrote about how many young organizations get seduced into trying to replicate the hit organization.

In "The Profit in Nonprofit," a new piece on the Stanford Social Innovation Review, Bethany Coates and Garth Salone have provided some incredibly valuable background about Kiva's founding story. Particularly, they do a great job explaining the back and forth the Kiva founders Matt and Jessica went through while trying to decide whether to be for-profit or nonprofit:

Despite the simplicity of their model, Flannery and Jackley ran into a tremendous amount of resistance from microfinance experts. “The criticisms were about both the supply side and the demand side,” says Jackley. “On the supply side, critics said that the idea wasn’t scalable because of the time and effort needed to vet borrowers and then to post their stories on the Web. And on the demand side, the critics said, for whom is this product intended?” The microloans were neither investments nor donations. “No one knew what to do with this bizarre, in-between product,” she says.

Another issue was how much interest (if any) Kiva could charge borrowers and return to lenders. Kiva’s founders originally wanted to offer lenders the option of earning interest on their loans, both to attract lenders and to transform the usual wealthy donor-poor beneficiary hierarchy into the more egalitarian lender-borrower relationship. Yet returning interest on loans could have turned the loan into a security in the eyes of the Securities and Exchange Commission (SEC). Offering a security to the public would trigger a long list of SEC requirements, including sufficiently collateralizing the loans and investing only in entities that comply with U.S. accounting standards.

Kiva’s founders also debated whether to be a nonprofit or a for-profit organization. Establishing Kiva as a nonprofit was the fastest way for the founders to get the site up and running. Yet they could not readily ascertain whether a charitable organization could extend loans rather than donations. They were also unsure what tax implications Kiva and its lenders would face upon the return of the loan principals and, should they charge interest, profits.

The rest of the must-read article can be found here.