My current place of employ gave everyone a Kiva gift card, which generated much excitement in the office when we each began looking into it. If you are like me, and knew little-to-none about Kiva, you will discover with a little bit of Googling that it is a meeting place of lenders, borrowers and microfinance organisations. How does it work? To explain this, allow me to contrast it with a more familiar situation.

In a typical lending scenario, a borrower (John Smith) wants to buy a house and goes to a lender (which bank?) to get a loan. The borrower fills out reams worth of paperwork and a combination of machines and people try to figure out how risky his profile is. If he is deemed credit worthy (can he pay back the loan in the time he claims he will?), the lender grants the loan from their coffers (which they amass from deposits/investments/gambling etc), John gains a new house (hurray), and becomes a slave to mortgage for the better part of his natural life (.. hurray?).

In this scenario, it is a little different. The borrower typically is ineligible for standard loans due to Circumstance X (he wants too little, he’ll take too long to pay it back, his income is too low etc). As a result, he works with a microfinance institution (Kiva calls them ‘Field Partners’ – they are out in the field after all!), who still has all the same high fixed costs of administrating  loans, but does not front the principal loan. Instead, the loan amount comes from you: the individual lender. The individual lender, unlike a formal lending institution, probably does not have sufficient capital to lend all the money that the borrower needs. So, multiple lenders supply small amounts of money each to create the full value of the loan.

But how would you know that Alia of Jordan needs only $775 for a juice-making machine? Or that Vahe from Armenia needs $1150 more for a calf and forage? How would you give amounts as small as $25 to help someone get his brother fly out of poor living conditions, in search of a new job? (while writing this post, someone donated that final $25 to make it possible). How would you know that there are 179 different Field Partners working in 67 different countries, trying to ensure everyone has access to financial services?

This is where Kiva comes in – it is the glue between all of these entities; providing the framework that allows you to donate to a need in a matter of minutes and facilitating the appropriate fund transfers.

My natural instinct when reading and learning about all of this was quite simple: surely it is a scam. Google is your friend though. Here are some articles to read.

What does it tell me?

• Kiva is a non-profit company that is funded by donations / grants. It passes on 100% of what you lend on the website. It works with microfinance institutions who administrate the loans with the borrowers. A few of these institutions have behaved irresponsibly in the past, and Kiva deals with that when they learn of it. Kiva is very transparent about all the activities and knowledge it has of these microfinance institutions (e.g. how high their interest rates are to other providers in that country), to present as fair and unbiased view of their workings to the lenders.
• Microfinance institutions are for-profit companies that profit from the loans they administrate. They pass on 100% of what they are given to the borrower. Their interest rates look high when viewed through a first-world-lens, but you are encouraged to understand the economics of how it works before judging.
• Borrowers are for-profit individuals / companies that are seeking a better life for themselves. They cannot gain credit from traditional sources, and so turn to these microfinance institutions to improve their soil, lay down floors, or buy transportation. These aren’t “causes”, they are simply ordinary individuals and entrepreneurs who can’t justify their income/assets to a traditional lender to get a personal/business loan. With a 99% repayment rate, they obviously can (in general) pay the interest rates and achieve their goals – they just don’t fit the normal mold of borrowers in their area.

To be clear: this is not a charity. The system only works when everyone makes money. This is not the site to go to if you are wanting to build wells for a community – there are plenty of outlets for that. This is about helping people get access to financial services where it is otherwise hard for them to do so.

What do you, as the lender get out of it? My boss told me he first got involved with Kiva a few years ago. After the first year, all of his loans were repaid by the borrowers. This meant he had the original principal to lend again to new borrowers. So, the cycle repeats: helping other people achieve their personal and business goals with small loans, having the loans repaid over the year, and then finding the next people to help a year later.

Having just made a series of loans, I look forward to that same experience come next year too. I looked for people starting businesses, or those who were investing in an income-generating asset, and am confident that these people will achieve the success they desire in their life, repay their loans, and enable me to lend to somebody else next year.

Does this sound appealing to you? If so, use this link to join Kiva. For each person that joins using that link, there is an extra $25 I can lend to another borrower.

Truly, the gift that keeps on giving!