Indirect P2P Platforms

2011 Global Microcredit Summit Commissioned Workshop Paper November 14-17, 2011 – Valladolid, Spain

Written by: Timothy Hassett, VP Microfinance Kiva, USA

JD Bergeron, Sr. Director of Social Performance Kiva, USA

Michelle Kreger, Director Strategic Initiatives Kiva, USA

Michael Looft, Regional Director Kiva, USA

With Assistance from: Greg Allen Dean Dubbe Emily Govel

Table of Content INTRODUCTION ...... 1 THE INDIRECT P2P MARKET ...... 2 Socially-Motivated Investment or Social Capital ...... 2 Global or Regional Focus ...... 4 General Loan or Special Loan Products ...... 4 Risk Tolerant or Risk Averse ...... 5 GLOBAL IMPACT OF INDIRECT P2P PLATFORMS ...... 6 Helps MFIs Scale and Attract Funding ...... 6 Spurs Innovation in New Products ...... 7 Crowd-funding democratizes social investment ...... 7 Education Vehicle for Lenders on Base of Pyramid ...... 8 Do some Indirect P2P Platforms create a market distortion?...... 8 ADVANTAGES AND DISADVANTAGES OF WORKING WITH INDIRECT P2P PLATFORMS ...... 9 Disadvantages of working with Indirect P2P Platforms ...... 9 Foreign Currency Risk...... 10 Higher Operating Costs ...... 10 Threats to Borrower Privacy...... 10 Liquidity Fluctuations...... 11 Advantages of working with Indirect P2P Platforms ...... 13 Low Cost Funding (for Social Capital Indirect P2P Platforms) ...... 13 Public Relations ...... 14 Risk Transfer to Catalyze Innovation ...... 14 Borrower Empowerment ...... 14 Assists Development of Best Practices ...... 14 CHALLENGES FACING INDIRECT P2P PLATFORMS ...... 15 Transparency ...... 15 Losses ...... 16 Image of the Microfinance Industry ...... 18 FUTURE GROWTH AVENUES FOR INDIRECT P2P PLATFORMS ...... 19 Technology ...... 19 Credit Bureau and Repayment Data ...... 20 Deeper Utilization of Social Networks on Indirect P2P Platforms ...... 20 Small Business Lending ...... 21 Beyond Microcredit...... 21 Micro-Insurance ...... 21 Individual Development Accounts ...... 21 CONCLUSION ...... 22 APPENDIX ...... 23 Appendix A ...... 24 Appendix B ...... 26 Endnotes ...... 28 INTRODUCTION The Information Age has changed the way people communicate, connect, shop and donate. In this new environment, Web 2.0 platforms have proven to be powerful tools for raising significant amounts of crowd-sourced social capital. Crowd-sourcing sites across the Internet have tapped into this power, raising significant sums for social needs in small amounts from a large number of users. Network for Good has raised some $500 million in on-line donations for non-profit organizations since 2001.I

Online Microfinance Intermediaries (Online MIs) are Web 2.0 platforms that crowd- source funds for microfinance borrowers. Since 2005 three different types of Online MIsII have developed and proven their ability to source large amounts of capital. Two of these models are based on person-to-person (P2P) connections.

Direct P2P Model – Direct P2P allows borrowers and lenders to connect directly, eliminating a bank or other financial intermediary, to provide for greater access to credit at a lower cost. Zopa in the United Kingdom was the first Direct P2P online marketplace and has raised over $217 million since opening in 2005III. It was followed by platforms such as ProsperIV and Lending ClubV in the United States during 2006 and 2007 that have raised $242 million and $305 million in loans respectively. This model has generally evolved in economically developed markets, but China also benefits from Direct P2P Platforms.

Indirect P2P Model – The Indirect model typically provides capital to developing markets by connecting borrowers and lenders through local intermediaries or field partners1. Kiva was the first Indirect P2P online marketplace and as of July 2011 had raised almost $225 million in loans since 2005.VI MyC4 is one of many other Indirect P2P platforms. Since its founding in 2006, MyC4 has raised over $19 million in loans.VII

Microplace Model – This model does not rely on P2P connections and is named after Microplace that was founded in 2007. Microplace crowd-raises investment funds for issuers such as Oikocredit and Calvert. Microplace investors choose local projects to finance, but take credit risk on the issuer.VIII

All of these Online MIs democratize ways in which funds are raised for microfinance. Individuals can participate in the industry and lend low amounts of $25 or less. Direct and Indirect P2P platforms connect lenders with borrowers and help lenders understand the challenges and opportunities that people face around the world.

1 For purposes of this analysis, Indirect P2P participants may have their loans booked for accounting purposes with the local intermediary or not. Regardless of where loans are booked, Indirect P2P participants use local intermediaries to source borrowers. Borrowers source themselves on Direct P2P sites. 1

This paper reviews the evolution, prospects and challenges of the Indirect P2P model. Indirect P2P participants are identified and compared along criteria such as their target markets, risk tolerance and whether financial returns are offered. Advantages and disadvantages faced by an MFI working with an Online MI are highlighted as well as a discussion of the issues raised in CGAP’s 2009 Focus NoteIX about online funding.

THE INDIRECT P2P MARKET No trade association or other group consolidates information on the Indirect P2P market. We have identified 24 Indirect P2P market participants (see Appendix I), including platforms such as: a) Lend for Peace who connects lenders with micro-entrepreneurs in the Palestinian TerritoriesX; b) Wokai whose lenders make a permanent investment in a loan fund after three loan cycles in ChinaXI ; and c) Zafen that is person-to-project and allows for loans or donations to projects in Haiti.XII

Of the 24 Indirect P2P Platforms identified for this study, 19 are not-for-profit with 4 for- profit participants including: MyC4, MyElen, 51Give and Veecus. Milaap is a hybrid (non-profit/for-profit) entity. As of March 2011 approximately $233 million had been raised through Indirect P2P platforms with some 90% through Kiva.

Table 1 Top Five Indirect P2P Platforms Information as of Q1/2011 Platforms Loans Funded Kiva $210,000,000 MyC4 $18,000,000 Babyloan $2,300,000 RangDe $1,000,000 MyELEN $900,000

Indirect P2P platforms can be differentiated based on whether: a) they provide social capital or socially-motivated investment capital2; b) a global or more specific market for borrowers is served; c) general or only special-purpose loans are originated; and d) lenders take the risk of borrowers, field partners or both.

Socially-Motivated Investment or Social Capital Certain Indirect P2P platforms provide socially-motivated investment capital where lenders can receive a financial return. Lenders at MyC4 can receive a financial return based on a “Dutch auction” undertaken when loans are funded on the website.XIII Others, using the model pioneered by Kiva, provide social capital with loans made at interest-free rates.

2 Financial returns are paid to lenders of socially-motivated investment capital 2

Of the 24 Indirect P2P platforms identified, 20 provide no financial return to their lenders. Four platforms offer some type of investment return and are located outside the United States due, most likely, to US securities regulations. Over 90% of funds provided by Indirect P2P platforms, to date, have been interest free for field partners. While only four Indirect P2P platforms provide a financial return to lenders, ten charge some fee to participating MFIs including the French platform, Babyloan. Babyloan earns funds through fees paid by lenders and a small fee from participant MFIsXIV.

Even when no interest or other fees are charged, all platforms require participating MFIs to incur operating costs to post loan requests and provide follow-up information. In addition, currency risk is often created since lenders fund in currencies (dollar or euro) that are different than currencies in which loans are made. Lenders to certain platforms, such as MyC4, assume all currency risk.XV Other platforms generate currency risk for participating MFIs. From the grouping of 24 Indirect P2P platforms, nine create currency risk for participant MFIs. Among those that create currency risk, Kiva provides a “stop-loss” protection for its partners.XVI To mitigate the risk significant currency devaluations can have on an MFI, Kiva allows its field partners to choose currency protection when loans are posted to the website, where the risk of currency loss on such loans greater than 20% is taken by Kiva lenders.

Table 2 Comparison of Indirect P2P Platform Costs to MFIs3

3 Lender & MFI Costs: if platforms charge fees or interest = 1 and 2 if both are charged. FX Costs: if platforms offer stop-loss/other protection = 1 and 2 if full FX risk is born by the MFI. 3

Global or Regional Focus Eleven of the 24 Indirect P2P platforms reviewed in this study operate with partnerships throughout the world, whereas 13 have chosen a regional or national focus. Regional focuses can have numerous advantages in that they: a) are less operationally complex; b) provide a simpler lender experience; and c) can more easily deal with unique regulatory constraints in a given country. Globally-focused platforms benefit from: a) economies of scale; and b) the ability to offer significant variety to their lenders.

Kiva has taken a global focus compared to Wokai, which has taken a national focus. At the end of 2010, Kiva’s network of field partners extended to 58 countries around the world. With 126 total field partners, Kiva has relationships in many countries with multiple institutions, although it has only one partnership in some countries. Wokai has taken a different approach by operating in a single geographic area: China. It currently works with two field partners operating in the rural regions of Inner Mongolia and Sichuan. Wokai plans to continue its expansion and add additional field partners, but remain within the political boundaries of China.XVII

The geographic focus of some Indirect P2P platforms has allowed for differences in the operating model. On Kiva, for example, lenders can withdraw loans whereas on Wokai “loans” are effectively tax-deductible donations that remain in China and are used to continue funding new loans.XVIII Wokai’s approach creates no foreign exchange risk for its field partners and does not require regulatory approval to repatriate funds back to lenders. This operating model has allowed it to work in a market that Kiva has not yet been successful entering because of foreign exchange repatriation regulations.

General Loan or Special Loan Products Of the Indirect P2P platforms surveyed, six are focused on funding specific products such as loans to students or for clean energy products. Of those focused on student loans, Janta takes a wide-reaching approach, funding primary, secondary and vocational education.XIX Vittana is focused specifically on higher education loans to students throughout the world.XX Other specialties include green energy; Energy in Common allows lenders to fund energy projects, such as the purchase of solar lighting kits for their homes or businesses.XXI

The remaining Indirect P2P platforms surveyed provide funding for general loan products where the choice of what loans to make available to fund on the platform is generally left entirely to the field partner, subject to the general terms and conditions of the Indirect P2P platforms.

Risk Tolerant or Risk Averse Another main area of distinction among the Indirect P2P lending platforms is their approach to risk.4 Risk tolerance can be defined as allowing the lender to assume all risk for borrower default. If the MFI is unable to collect on a particular loan, then the lenders lose their loan amount. Those less risk-tolerant among the grouping require their partner microfinance institutions to cover borrower defaults. This feature means that lenders never experience loss on the borrower level, but they may still experience institutional default when loans are booked at the field partner.

Having lenders take the risk of borrower default may facilitate innovation in microfinance. Lenders’ patient capital could allow for greater experimentation by MFIs with certain innovations scaling and then becoming funded by commercial or less risk- tolerant capital. This concept is explored in more detail in the next segment of the paper on the Global Impact of Indirect P2P Platforms. Conversely, if implemented without sufficient transparency, this feature could encourage partner MFIs to post poorly vetted clients that ultimately default.

Table 3 Indirect P2P Risk Tolerance Only Platforms that responded to our survey were included

Borrower Risk

Yes No Deki Babyloan Energy in Common MicroWorld Good Return United Prosperity Yes Kiva Xetic

MyC4

Vittana

Risk

Lend for Peace Rang De (proportions of defaults covered by a Zafen Contingency Fund) Partner Partner

4 Risk tolerance can also be defined as the type of field partners hosted by the platform in terms of: 1) their credit risk and 2) the risk level of their borrowers. This has not been addressed in this paper due to lack of readily available information, but could be the subject of another study. 5

For the first four years of its operations, Kiva allowed its field partners to guarantee their loans. Many MFIs chose to do so in order to protect their reputation among Kiva’s global community of lenders and because Kiva has a high level of visibility with other industry participants. This policy was changed in early 2010 in order to further deepen the connection between lender and borrower. Field partners must now post their actual repayments from Kiva borrowers with Kiva lenders assuming the risk of loss due to borrower default.

GLOBAL IMPACT OF INDIRECT P2P PLATFORMS There are many benefits that can result from Indirect P2P platforms. There is also a question as to whether certain of the platforms cause damage by disrupting markets.

Indirect P2P platforms can have four critical positive impacts in that they may: 1) strengthen participant MFIs and allow them to attract other sources of funding; 2) spur innovation in MFIs, and help new microcredit products scale; 3) democratize social investment; and 4) create connections that educate lenders about conditions facing their borrowers.

Critics have questioned whether the risk-tolerant or interest-free concessionary capital raised by some Indirect P2P platforms disrupts the market. A market disruption could potentially mean that less total capital was serving the base of the pyramid because commercial capital was forced out or that products are offered at an unsustainably low rate, which could hurt borrowers in the long run. The final portion of this section provides arguments for why we do not believe the sector creates a market distortion.

Helps MFIs Scale and Attract Funding Indirect P2P platforms are in a position to support MFIs that may have difficulty attracting capital from other institutions. Kiva has sometimes been an MFI’s first international funders in countries such as Afghanistan, Benin, Burkina Faso, Burundi, Liberia, Palestine and Sierra Leone. The additional capital that partner MFIs receive helps them to achieve economies of scale. Member MFIs also share information on their Kiva partner page that can be reviewed by other industry participants including more traditional MIVs.

One good example is Kiva’s early funding in Sierra Leone through a relationship with Salone Microfinance Trust (SMT) in May, 2007. Over $1.8 million in loans have been funded by Kiva lenders since that time and SMT became operationally sustainable in 2008 due, in part, to growing their loan portfolio and achieving better economies of scale. In 2010, SMT successfully entered into a relationship with another international funder, Microcredit Enterprises.XXII

Spurs Innovation in New Products Indirect P2P platforms generally provide either or both interest-free capital and risk- tolerant capital. They create cost savings that can allow participant MFIs to incur higher operating costs to: a) offer microfinance-plus services; b) invest in new products; c) reach remote populations; or d) work with riskier borrowers.

Energy in Common uses its lenders’ social capital to incentivize the creation of energy- efficient loan products at their partner MFIs. These products benefit borrowers because repayment on these loans is made from the borrower’s avoided cost for the replaced energy sources (kerosene, candles, etc). When the loan is fully repaid, the borrower’s budget improves since purchases of kerosene or other fuel are no longer necessary. These products also benefit the environment and Energy in Common provides its lenders with an estimate of the carbon savings created by the loans being raised.

Vittana works with its partner MFIs to use its lenders’ social funds to create and grow the market for student loans. Vittana helps MFIs design and monitor new student loan offerings. It provides information to lenders on the expected earnings benefit of the degree being pursued by the student whose loan is financed.

Crowd-funding democratizes social investment The Indirect P2P funding model pioneered by Kiva has inspired numerous platforms, many of which are included in this paper. While implementation of the model has varied, all have attempted to utilize crowd-funding for social good. Social investment and the ability to “vote with one’s dollar” had been an activity mostly available to high net worth individuals. The new lending platforms democratize social investment and allow almost anyone to participate for $25 or less and share their experience through social media. The impact is intensified by the opportunity lenders have to use their “voice”, in addition to their dollars, by sharing their experience through social media.

The rise of Facebook, Twitter and other social media platforms has given individuals the opportunity to share their thoughts and activities with ever-expanding networks of like- minded people. Facebook has created new possibilities to engage individuals and connect them to one another around common interests. Many philanthropic organizations have shifted their main outreach efforts onto Facebook and created comfort around the idea of doing good in the online environment. Indirect P2P platforms arrived at the perfect time to capitalize on this new social movement.

Bringing together the power of the Internet and social media with the promise of microfinance in economic development has proven to be an accessible, attractive and expandable solution for uniting people and affecting change.

Education Vehicle for Lenders on Base of Pyramid Participation in Indirect P2P lending provides lenders not only with a way to “vote with their dollars”, but also with an opportunity to learn more about other countries, contexts and ways of life. With $25 lent to a coffee grower, Maria, in the Guatemalan highlands, an Indirect P2P lender is much more likely than the average person to take note of a swing in coffee prices, or to read the headlines about happenings in the country. This inspiration is motivated by personal connection. What will make Maria succeed in growing her business? How much does a coffee grower really make a year? The next time Maria’s lender is at the local Starbucks, a few more moments may be spent reviewing brochures about local growers.

The progression of curiosity in learning about Maria’s need for capital to caring about her business, family, community and nation is consistent with an overarching reorganization of the world away from just macro-level global connections and towards the development of personal connections, relationships and networks facilitated by the Internet. Just as Facebook and Twitter are recreating the way we consume online content, Indirect P2P lending is helping to shift the way we become inspired to be global citizens.

Do some Indirect P2P Platforms create a market distortion? As noted previously, Indirect P2P Platforms can reduce costs to partner MFIs in two ways: 1) zero or advantageous interest expense and 2) absorption of borrower default risk. Most Indirect P2P platforms in the grouping lend at a zero-percent interest rate and over half of them have lenders take the risk of borrower default.

Critics have raised a question as to whether this distorts the microfinance market and crowds-out commercial funding. Two conditions are necessary for such concessionary funding not to distort the market: 1) the funding must be consistent; and 2) funds should be used for purposes that cannot easily be met by commercial sources.

A potential market disruption would exist if funding from concessionary Indirect P2P Platforms were not consistent. MFIs participating with such platforms make plans regarding their capital structure and product offering based on having consistent access to these concessionary funds. The elimination of these funds could have a significant impact on a participating MFI’s operations. Since 2005, it has become clear that there is a consistent level of concessionary funding through the Indirect P2P market with over $200 million lent on an interest-free basis. The Online MI concessionary platforms tapped a new supply of funds for the microfinance industry by creating markets for lenders not based on financial remuneration, but on the satisfaction of creating a connection and assisting borrowers.

Even though Indirect P2P Platforms have created a consistent source of concessionary funds, they could distort the microfinance market if such funds generally duplicate what

8 could be funded commercially. Kiva has developed a partner selection strategy to address market failures and spur innovation through the use of concessionary capital provided by Kiva lenders appearing below:

1. Expand the frontier of access to financial services in markets that have insufficient capital such as post-conflict or other under-served countries. 2. Create or expand positive: a) work with unbanked or under-served populations, b) development of new products or c) growth of microfinance “wrap-around” services including training, insurance and business consultations. 3. Reward MFIs that already provide the positive interventions indicated above. 4. Catalyze change at socially-motivated participant MFIs, who are likely to expand services noted above, in the short to medium term.

The breakdown of Kiva’s outstanding loan portfolio by partner selection strategy as of March, 2011 appears below.

Expand Access in Underserved Markets 21% Create or Expand Offerings 32% Reward Existing Offerings 44% Catalyze Future Change 3%

ADVANTAGES AND DISADVANTAGES OF WORKING WITH INDIRECT P2P PLATFORMS Following the initial success of Indirect P2P platforms, numerous debates arose in the industry as to whether this new funding model should be wholeheartedly endorsed. Some saw the arrival of crowd-sourced platforms as the cure to the sector’s funding problems. Others were more skeptical, challenging the model and the alleged benefits that crowd- sourced funding could provide to MFIs. Deborah Burand was one of the most thoughtful critics and in a 2009 CGAP report, noted seven important considerations for the sector.XXIII We have paraphrased these considerations along with comments regarding the industries recent experience in Appendix B.

There are clear advantages to working with Indirect P2P platforms, such as cost savings and publicity. There are also disadvantages and points that MFIs should understand when considering Indirect P2P platforms.

Disadvantages of working with Indirect P2P Platforms The major disadvantages to a participant MFI of working with Indirect P2P platforms include: a) foreign currency risk, b) higher operating costs, c) threats to borrower privacy, and d) liquidity fluctuations.

Foreign Currency Risk In the 2011 Microfinance Banana Skins report, participants rated foreign currency as one of the least important risks facing MFIs today.XXIV This ranking is a bit surprising, however, given the magnitude of risk foreign currency positions can present. Historically, large losses have been generated due to currency shifts, causing wide variations in returns to MFIs. These fluctuations can ultimately hurt the borrowers as well as the MFI in the form of higher costs and less certainty in the market.

As noted above, from the grouping of 24 Indirect P2P platforms, nine create currency risk for participant MFIs, including Kiva, Vittana and Microworld. Of these, Kiva offers partial transfer of currency risk to the lender, allowing MFIs to cap their losses at a certain percentage of exposure, thus reducing the need to hedge or reserve the full hard currency amount. The remaining portion of the group lends in local currency (Wokai), or they pass on the full risk of foreign exchange loss to the lender (MyC4).

Higher Operating Costs Operating costs associated with Indirect P2P platform usage often include: 1) capturing and generating profile content; 2) uploading profile content to the platform website; 3) managing reports and data during the course of each borrower’s loan; 4) providing updates on the loans; 5) communicating and working with the platform’s representatives; and 6) wire transfer fees. These costs can vary widely depending on the systems the MFI puts into place to incorporate the platform partnership into their processes, but they all essentially equate to managing an additional information system on top of the one in place for portfolio management at the MFI.

Kiva has leveraged its volunteer fellows program to help gather data on the operational costs of the Kiva relationship. Fellows across the world collaborated with their host MFIs to understand how much each organization was spending on salaries, digital cameras, computers, transportation and wire transfer fees. The result was a data set that allowed Kiva to form a rough estimate of the operational costs, which ranged between 0.5 and 4% of the total amount outstanding to the partner MFI. These costs were higher during the implementation phase and generally reduced over time.

Threats to Borrower Privacy Perhaps the most challenging aspect of working with an Indirect P2P platform is making sure that the borrowers whose pictures and stories appear on the Internet are fully aware of what their personal information is being used for. Because most of the funds generated by Indirect P2P platforms are based on loans disbursed before they are uploaded to the Internet for funding, client borrowers have very little incentive to check the Internet for their “funding status.”

Careful management at the practitioner level is required. Many platforms, such as Kiva, work with MFIs to incorporate client consent language directly into the loan contracting process. This language explains that personal information, such as a photograph and story, will be used for marketing and fundraising purposes. In some cases there is explicit mention of the Internet, in others, proxies such as “share your information with the world” has been substituted when borrowers are less likely to be aware of the Internet and how it works.

In sensitive contexts, such as conflict or post-conflict countries, Kiva allows MFIs to make the borrower profile anonymous and blur the distinguishing characteristics of the client’s face in the photograph to protect their identity. This option is currently being utilized by field partners in Iraq and parts of Lebanon.

There are many cases of borrowers seeing their profile on the Internet as a source of pride. Borrowers create a solid credit history, are building their businesses, and can see who is supporting them in this process. Stories across all Indirect P2P platforms that describe the empowering nature of this connection abound. During a field visit, one borrowing group in Ghana expressed great joy that their pictures could be on the Internet and considered it as their businesses “going international”.

Liquidity Fluctuations There are two major liquidity concerns MFIs potentially face when working with an Indirect P2P platform: 1) the potential volatility of incoming funding flows generated from the Internet community and 2) the potentially very short-term nature of Indirect P2P funding5 that often must be repaid when borrowers repay.

As noted previously, the Indirect P2P market has shown its ability to consistently raise funds since 2005 with over $230 million in loans. Initial concerns raised about Indirect P2P models regarding whether Internet lenders would fund loans erratically, or grow fatigued of lending, have not proven true. The ability to engage the Internet lending community has been a challenge with some of the smaller Indirect P2P platforms, however. Given the relative newness of the space, it is not clear how many Indirect P2P platforms will ultimately become fully sustainable.

In considering the continuity of funding, it is important to realize many of the Indirect P2P platforms create a stored value system. In certain cases, such as Wokai, accounts balances cannot be withdrawn. Once an initial loan is paid back, a lender must select another loan. Others, such as Kiva, allow lenders to withdraw funds and have re-lending as an option. In Kiva’s case, over 80% of repayments to lenders have been re-lent in

5 Kiva requires that all loans are repaid when the borrower repays on a monthly basis. This is not true for all Indirect P2P Platforms where repayments are made, as some do not repay lenders until the entire loan is fully repaid. 11

2011.6 To mitigate the impact of any variability in crowd-sourced funding patterns, Kiva generally limits its funding to no more than 30% of a field partner’s gross loan portfolio.

The second liquidity concern is inherent in the Indirect P2P model for certain platforms and should be understood by participant MFIs. Some Indirect P2P platforms, such as Kiva, require repayments to be made to lenders monthly when borrowers repay and rely on a net billing process for sending and receiving funds. In such cases, when an MFI opts to slow its loan posting volume or if their loans expire unfunded, there is an effective acceleration of the funds due to the Indirect P2P platform on any given month or billing period.

A comparison of two funding scenarios for MFIs using such an Indirect P2P platform, where payments are required monthly as borrower’s repay, is presented below. The assumptions for this analysis are: a) the MFI can raise no more than $40,000 USD on the Indirect P2P lending site each month and b) all of their loans have 10-month loan terms with equal payments due each month. The first scenario shows a generally steady flow of new funding to the website with new loans offsetting required repayments.

Table 4 Scenario 1: Relatively steady new funding volume:

B C B-C A Month Loans Funded Repayments Balance EOM 1 $10,000.00 $0 $10,000.00 2 $30,000.00 $1,000.00 $29,000.00 3 $30,000.00 $4,000.00 $26,000.00 4 $40,000.00 $7,000.00 $33,000.00 5 $30,000.00 $11,000.00 $19,000.00 6 $30,000.00 $14,000.00 $16,000.00 7 $20,000.00 $17,000.00 $3,000.00 8 $20,000.00 $19,000.00 $1,000.00 9 $40,000.00 $21,000.00 $19,000.00 10 $30,000.00 $25,000.00 $5,000.00 Paid to MFI: $161,000.00 Owed to Platform: $0

In this scenario, the MFI raises a relatively steady amount on the platform, allowing them to grow their outstanding balances to $161,000 in 10 months, with no required cash repayments to the platform during the period. As long as the relationship with the Indirect P2P platform continues and posting levels are maintained, little to no cash repayments are actually required to the platform. This situation changes in Scenario 2, where the MFI slows down their loan profile posting dramatically in month 6.

6 Funds that are not re-lent are either withdrawn or remain unused in the system. 12

Table 5 Scenario 2: Slow-down in usage during month 6 of partnership:

B C B-C A Month Loans Funded Repayments Balance EOM 1 $10,000.00 $- $10,000.00 2 $30,000.00 $1,000.00 $29,000.00 3 $40,000.00 $4,000.00 $36,000.00 4 $30,000.00 $8,000.00 $22,000.00 5 $40,000.00 $11,000.00 $29,000.00 6 $5,000.00 $15,000.00 $(10,000.00) 7 $- $15,500.00 $(15,500.00) 8 $- $15,500.00 $(15,500.00) 9 $- $15,500.00 $(15,500.00) 10 $- $15,500.00 $(15,500.00) Paid to MFI: $126,000.00 Owed to Platform: $(72,000.00)

As can be seen from the above, a decrease in new loans raised during month 6 leads to a rapid repayment to the platform. Of the $126,000 funded to the MFI, over half becomes due in a matter of four to five months when new funding is stopped.

Liquidity concerns arising from the repayment pattern of some Indirect P2P funding can be mitigated through proper financial and operational planning. From a financial perspective, MFIs should monitor their projected repayments to make sure they post sufficient loans to offset repayments, or have sufficient cash to make such repayments. Operational problems can also lead to volatility in posting when concerned staff quit an MFI or take extended leaves. MFIs should ensure there is appropriate back-up for the person(s) coordinating the Indirect P2P platform relationship to handle such events.

Advantages of working with Indirect P2P Platforms The advantages to a participant MFI of working with Indirect P2P platforms can include: a) low-cost funding, b) public relations, including to other funders, c) risk transfer that catalyzes innovation, d) borrower empowerment, and e) movement toward best practices in client protection or information flows.

Low Cost Funding (for Social Capital Indirect P2P Platforms) Over 90% of loans made through Indirect P2P platforms are interest-free to their MFI partners. This does not necessarily mean that the total cost incurred by the MFI to work with the platforms remains at zero. As noted previously, MFIs have additional operational costs as well as potential financial costs associated with foreign currency risk.

Nevertheless, these costs are generally less than commercial financing costs. Such cost savings can help a participant MFI scale and attract other sources of funding.

Public Relations Indirect P2P platforms provide a means for their partner MFIs to make themselves better known around the world. Potential funders, donors and other types of organizations can use the websites hosted by such platforms to identify interesting MFIs and learn more about them. This has proven to be an invaluable marketing tool for MFIs seeking both funding and greater exposure to the international community.

Risk Transfer to Catalyze Innovation Creating new and innovative activities is difficult in microfinance, since some MFIs have not reached effective scale. In addition, experimentation with new products entails high risk and significant operating costs for MFIs. Indirect P2P platforms, where lenders bear the risk of borrower loss, eliminate the cost of credit risk for new products. Platforms that also provide loans at zero interest eliminate financing costs and may allow for higher operating costs to create new products.

As noted earlier, Kiva enforced the transfer of borrower risk to lenders in early 2010. Most of its field partners had previously been very concerned about their default rate displayed on the website and covered borrower losses. There was a general perception that lenders would not fund their loans if defaults occurred and were concerned about showing defaults on the website that could be seen by outside stakeholders, including funders. There is a potential risk that Kiva’s enforcement of risk transfer could lead to a “flight to quality” where only the lowest-risk borrowers are posted.

Field partners are slowly becoming more comfortable showing some defaults on the Kiva website. Lenders seem to be accepting borrower defaults if reasons for the default are communicated to them. Field partners need to feel comfortable showing a certain level of default on risk-tolerant Indirect P2P platforms so that the platforms’ capital can really work as a catalyst for new and innovative loan activities.

Borrower Empowerment Low-cost social capital can allow MFIs to develop or enhance social programs designed to empower their clients from a holistic perspective. Technical job training, nutritional counseling, savings clubs, and community projects: these things become more possible when MFIs receive low cost funding from Indirect P2P platforms. Such platforms have now reached legitimacy as consistent sources of low-cost funds and can motivate their field partners to use the cost savings to expand wrap-around services.

Assists Development of Best Practices Indirect P2P platforms that work in a global context understand that what may work in one environment may not necessarily work in another. Nevertheless the heart of 14 microfinance is helping people as fairly and efficiently as possible. Some Indirect P2P platforms work with so many different types of MFIs they are in a unique position to help develop best practices.

Kiva has invested in its network of partner MFIs to: a) promote the Client Protection Principles, b) conduct social performance audits and c) incent reporting on the MIX Market:

 Client Protection Principles – Kiva has requested its partner MFIs to either endorse the Client Protection Principles or to give valid reasons why they will not make such endorsement.

 Social Audit - Kiva has utilized its Kiva Fellows Program to send dedicated volunteers to complete social performance evaluations of its partners. These evaluations are shared with the partners, along with feedback for how to improve their social performance.

 MIX Reporting – Once the social audit is completed with the field partner, Kiva has suggested they report the social data to the MIX Market. Between 2009 and 2010 there was a 50% increase in the number of Kiva field partners that reported social data on the MIX.

CHALLENGES FACING INDIRECT P2P PLATFORMS With over $230 Million in total loans since 2005, the Indirect P2P market has shown its ability to crowd-raise funds for microfinance. The key challenges in the market today relate to whether new lenders join and existing lenders continue to lend.

The addressable population for crowd-sourcing funds is huge and includes virtually anyone with a computer and credit card. To reach this addressable population, an excellent reputation is critical for the Indirect P2P platforms. The market’s reputation can be impacted by: a) inadequate transparency, b) losses, or c) the image of the microfinance industry.

Transparency A clear and transparent lending experience should be one of the hallmarks of a successful Indirect P2P market. Lenders want to understand the transaction they undertake and get reports on progress. There was an issue raised about Kiva’s transparency at the end of 2009. This issue could have become critical to the entire industry given the significant size of Kiva’s space in the market.

“Kiva is Not Quite What it Seems”XXV was a blog posted in October 2009 that challenged Kiva’s transparency and alleged similarities with child sponsorship organizations that

15 were the subject of criticism in a Chicago Tribune exposé in 1998. It led to a November 2009 New York Times article by Stefanie Strom, “Confusion on Where Money Lent via Kiva Goes” stating that “the direct person-to-person connection Kiva offered was in fact an illusion”XXVI.

Information regarding the fact that: a) many Kiva loans were pre-disbursed to borrowers and b) that funds were sent to field partners, was already available on the website. In fact David Roodman also noted:

Moreover, the way Kiva actually works is hidden in plain sight. On the right of Phong Mut’s page, you can see that MAXIMA lent her the money on September 8 and listed her on Kiva on September 21. So while Kiva is feeding a misunderstanding, it isn’t technically hiding anything.XXVII

Kiva responded to the blog, made changes to its website and the story ended. It serves as an important cautionary tale for the industry and the impact on Kiva’s growth is not clear. While new Kiva lenders were lower in 2010 (125,624) than in 2009 (144,964), growth accelerated in the fourth quarter of 2010 to a rate higher than in previous years. The overall decrease in new users during 2010 could be attributed to many factors, including a deterioration of the microfinance industry’s reputation.

Losses Depending on the model an Indirect P2P Platform is using, there are four ways lenders can lose money: a) the platform closes, b) participant MFIs fail, c) borrowers default or d) foreign exchange losses occur.

Although some Direct P2P platforms have failed and caused losses to lendersXXVIII, no significant Indirect P2P platform has closed to date. Lenders losing money through closure of one or more Indirect P2P industry participants could cause lenders to look more into the financial health of a platform7. This would likely be truer for lenders who have significant sums lent than those with no more than $25 at risk.

Kiva’s experience has been that lenders are tolerant of losses, but generally more upset losing funds when a participant MFI fails than when a borrower fails. Lenders connect with borrowers in making lending decisions and are often not be terribly concerned if they lose money due to a borrower default, especially if they understand why the default occurred. Such strong connections are generally not achieved with the field partner MFI, making losses from an MFI failure more difficult for lenders to accept.

Data from Kiva initially indicates that lenders are relatively tolerant of losses from either the failure of a MFI or individual borrower. From the December 2008 cohort of 22,560

7 In order to protect its users in the event the platform closes, Kiva has created an account that would not be subject to the claims of Kiva creditors, other than users for whose benefit the funds are held. 16 new Kiva lenders, 7.8% of those who experienced some default withdrew funds compared to 5.6% of the remaining lenders who withdrew funds. While more lenders who experienced default withdrew funds, the difference was not significant. However, the amount withdrawn by those experiencing a default was some five times larger than for those who did not experience a default. This indicates a relatively strong level of risk tolerance for the Indirect P2P segment. This tolerance may not be the same for socially- motivated investment platforms where lenders are anticipating a financial return.

Kiva has found a significant subset of its lenders to be supportive of lending into riskier environments. The situations in Nicaragua and with a partner in Ghana, Christian Rural Aid Network (CRAN), are illustrative.

Highlighting the significant risk in lending to Nicaragua with the evolution of the “No Pago” movement, Kiva has placed three different alert texts on all Nicaraguan loan pages since October 2009. Such alert texts are highlighted for lenders to see. The initial alert message is shown below. Since its placement, Kiva lenders have lent almost $4.4 million to its six Nicaraguan field partners at a time when commercial funding appears to have declined and costs increasedXXIX.

In mid 2008, a movement began in Nicaragua called “Movimiento No Pago” (a movement for non-payment of loans). This movement, supported mostly by farmers of the north of Nicaragua with ties to the left-wing party in Nicaragua, has been organizing protests (some violent) and forcing microfinance institution branches to close. This movement has been fed by the global the economic crisis, which has made it difficult for many Nicaraguans to pay back their loans.

This group has submitted a law to the government to create a moratorium on debt repayment. The group contends it will not make payments on their loans until such law is passed. If passed, the law could have a crippling effect on the microfinance industry and banking sector in Nicaragua. The network of microfinance institutions in Nicaragua (ASOMIF) has been negotiating with the government in support of an alternative proposal. Kiva, along with 25 other funders from 9 countries, has signed onto a letter to the Nicaraguan government urging a resolution to this situation without enacting a moratorium on debt repayment. The potential passage of the debt moratorium increases the risk of lending in Nicaragua. For more information, please see the following article: http://impreso.elnuevodiario.com.ni/2009/09/24/nacionales/110236

The notification, appearing below, regarding CRAN, was placed on their loans in September of 2009. Since that time, Kiva Lenders have funded some $500,000 in loans to CRAN as it works through a restructuring8.

Please note that Kiva considers loans to this Field Partner, CRAN, to be particularly HIGH RISK. This organization has had very serious delinquency problems brought about

8 Note that Kiva and other major creditors to CRAN entered into a restructuring agreement so that funding from Kiva Lenders was not used to repay other creditors. 17

by problems with its credit methodology, local environmental shocks including a depletion of local fisheries in its core area of operation (Cape Coast and the Central Province), and insufficient follow up with late clients. Lenders to this business should be aware that there is an increased risk of not getting repaid on this loan due to the challenges facing the Field Partner.

Image of the Microfinance Industry The global image of the microfinance industry can have a significant impact on Indirect P2P platforms. For almost a decade, the microfinance industry has benefited from an unadulterated positive perception in the general public. While industry insiders were careful to affirm that microfinance was no “magic bullet” for ending poverty, the mainstream media attributed gushing reviews that there was, at last, a movement with real promise to alleviate poverty worldwide. The crowning moment was when the Nobel Peace Prize was awarded to Mohammed Yunus of the Grameen Bank in Bangladesh. The Nobel Committee validated the microfinance movement and established a firm statement that addressing poverty is the same as building a more peaceful world.

All over the globe, stories were being told of women living in the rural villages of Uganda, Peru, Cambodia and Nepal who took small loans and bit of entrepreneurial spirit and transformed their lives. It was a simple story endorsed by economic development professors and embraced by the general public quite spectacularly. Indirect P2P platforms emerged in the midst of this period and grew rapidly with the help of glowing reviews similar to those being given to microfinance itself. When Frontline spotlighted Kiva in the fall of 2006, the Website was immediately overwhelmed with hits and experienced a complete technical shutdown.

Many in the public began to equate Kiva’s innovative online funding model with the entire microfinance industry itself. Perhaps it was inevitable that such a tremendous focus of media attention would eventually draw detractors. The first big criticism, mentioned previously, revolved around questions of transparency and the clarity of Kiva’s message.

Six months later in the New York Times came a second critical review.XXX The story revolved around high interest rates and a Kiva field partner, Lift Above Poverty Organization (LAPO), a microfinance institution in Nigeria. Some in the general public now perceive MFIs as “middle men”, charging exorbitant interest rates to poor people seemingly quite out of line with Western rates. Unfortunately, the same misperceptions that led some to consider microfinance-as-magic-bullet also obscured the complicated and expensive process of providing small loans to poor people.

Kiva’s initial response attempted to touch on a number of these issues in support of LAPO.XXXI Kiva ultimately decided to suspend or “pause” its relationship with LAPO until a clear plan and demonstrable progress on key metrics regarding its social mission were obtained. Kiva also had concerns that continuing negative press could lead to a

18 reduction in funding from Kiva lenders that could have a negative impact on its more than one-hundred other field partners.

In late 2010, in addition to the concerns and misunderstandings of the general public, news media and bloggers increased scrutiny on the microfinance industry after a large- scale crisis in the Andhra Pradesh province of India. High levels of investment capital pouring into the region may have contributed to too much focus on growth and excessive lending. The resulting over-indebtedness of clients and sometimes-aggressive collection practices by MFIs were reported to have had terrible results, including a number of alleged borrower suicides.

Two of the biggest concerns in the industry today are over-indebtedness of borrowers and a lack of proof of impact of microloans in their lives. Important initiatives have arisen to respond to these growing concerns, such as the Smart Campaign for Client Protection, the Social Performance Task Force, and UNPRI’s Principles for Responsible Investment.

Indirect P2P platforms will need to embrace these efforts and promote them amongst their partner MFIs in order to ensure they are representing responsible microfinance. Given the high visibility of Indirect P2P platforms, their reputation may be even more important than that of individual MFIs. MFIs need only report to their investors, networks and related stakeholders. Indirect P2P platforms must also respond to the public and media, which support and sustain them. In terms of visibility, it should be noted that Kiva has some 40,000 visitors to the website daily.

FUTURE GROWTH AVENUES FOR INDIRECT P2P PLATFORMS Indirect P2P platforms have many growth avenues. Some entail financing innovative loan products, including water, green energy and student loans or new instruments such as small business loans or social equity capital. Technology offers enormous potential in areas such as mobile payments and data integration. New interventions can be created by the platforms in areas such as micro-insurance and individual development accounts.

Technology Technology plays a critical role in the microfinance industry. Thought leaders have long hoped that it could lower operational inefficiencies and transaction costs in order to reduce interest rates for low-income borrowers. While some areas of technology have become critical obstacles in microfinance such as insufficient or unaffordable MIS (Management Information Systems) solutions, other innovations such as mobile payments are leading the way to whole new markets and opportunities to serve unbanked people.

Indirect P2P Platforms can work with their networks of Field Partners to explore ways in which mobile payments and MIS integration can be used to lower the cost of raising 19 funds through the P2P Platforms. We are potentially not too far off from the day when: a) loan officers complete and processes an online loan application form for a client using a handle-held PDA, b) they receive loan approval from their institution, c) approved funds are transferred to the client through their mobile phone and d) the loan request is transferred to an Indirect P2P Platform for funding – with the entire transaction taking less than an hour.

Credit Bureau and Repayment Data Few developing countries have strong credit bureaus or credit reference services. This means that not all potential borrowers have equivalent access to credit. It also means that MFIs have a difficult time making sure their borrowers do not get over-indebted by borrowing from other institutions. Some had thought Indirect P2P platforms were an answer to this problem.

Indirect P2P platforms have repayment data on their borrowers and, subject to privacy and credit reporting regulations in the borrower’s country, sharing this data publicly may be possible. Unfortunately, this is not a good substitute for credit bureaus or reference services. Data would only be available for the platform’s borrowers and only for the platform’s loan(s) with the borrower. Repayment history for a borrower’s non-Indirect P2P platform loans would remain unavailable.

Credit bureaus or credit reference services are required at the national level with mandatory reporting by all national credit providers using a unique client identifier for each borrower. Indirect P2P platforms do not eliminate this need.

Deeper Utilization of Social Networks on Indirect P2P Platforms Indirect P2P networks have begun to successfully mobilize social networks in the pursuit of raising low-cost debt capital for MFIs. Lenders on some Indirect P2P platforms, can band together to join teams or interest groups that compete for raising the most amount of money possible for microenterprise borrowers.

These platforms have been less successful, however, in surfacing the complex social relationships that unite microfinance borrowers to each other, their guarantors, and their loan officers. They have also been less successful in generating reciprocal relationships between the borrower and the lender. There are several ways in which such connections can grow. Indirect P2P lenders can be used to provide business advice or coaching to borrowers. Social networks could also be used to help market some of the products produced by borrowers. Imagine a world where lenders reach out to their social network to get them to purchase goods produced by their borrowers.

Small Business Lending Most Indirect P2P sites focus on the microfinance space, leaving out funding for what has often been called the “missing middle.” As the space expands, Indirect P2P platforms could potentially benefit from expanding the loan caps and helping to expand access to financing for SME borrowers. Inventure is a new P2P platform that finances SMEs where borrowers: a) provide a social return to lenders called social enterprise expansion dollars and b) give a percentage of their revenue to community development initiatives.XXXII Indirect P2P platforms can also be used to fund SMEs on a person-to- project basis.

Beyond Microcredit Indirect P2P platforms have a user base that trusts the platform and cares about the base of the pyramid. This allows platforms to experiment with new ways their users can connect and support those in need. Micro-insurance and Individual Development Accounts are only two of the possible new interventions for Indirect P2P platforms.

Micro-Insurance P2P platforms whose lenders take the risk of borrower default already provide credit insurance to their partner MFIs. If there is a drought or natural disaster and the borrower cannot repay, the lender loses the loan amount, not the MFI. In other words, the MFI is insured against such events for the loans made by the platform. There is really no reason, however, that the insurance should only be available when loans are outstanding to platform lenders. It should be possible that entrepreneurs benefit from insurance even if they are not indebted.

Subject to insurance regulatory considerations, indirect P2P platforms could create insurance pools where insurers, instead of lenders, advanced funds to cover an agricultural crop risk pool that was allocated to beneficiaries in a pre-defined area. A small fee might be required to cover costs of a local service provider. The payment event would be defined based on verifiable outcomes (rainfall levels) eliminating the need for high-touch administration to verify claims. If the event did not occur, the micro-insurers would recover their funds for withdrawal or re-use in another insurance program.

Individual Development Accounts Individual Development Accounts are another intervention that could be explored by Indirect P2P platforms. The platforms could crowd-source capital from saving accelerators, instead of lenders. Saving accelerators would make funds available to be used if a saver achieved pre-defined savings goals. If the savings goals were met, the funds would be donated to the saver. If the savings goal were not met, the funds would be released to the savings accelerators for withdrawal or re-use in the saving acceleration program.

CONCLUSION Having emerged as a viable industry segment, Indirect P2P platforms have contributed significant amounts of risk-tolerant, low-cost capital to microfinance. While it is too early to define the ultimate composition of the industry segment, such platforms have proven their fund-raising capacity and ability to connect lenders and borrowers.

Prospects for Indirect P2P platforms are quite positive. For MFIs, increased access to risk-tolerant Indirect P2P funds holds great promise for spurring product innovation and improving the quality of products and services offered to clients. Savings from this type of low-cost funding source have already shown their ability to help improve MFIs’ core product offerings and allow expansion into new areas of coverage. In addition, the risk tolerance demonstrated by some Indirect P2P internet lenders is a valuable asset for MFIs seeking to experiment with new products while not assuming all of the risk of loss.

There are also exciting opportunities for Indirect P2P platforms to further connections and reduce costs through mobile technology and MIS integration. The more technology is able to assist practitioners in connecting lenders to borrowers, the greater level of collaboration will likely be seen in the Indirect P2P market. This collaboration holds great potential for empowering borrowers and creating increasing understanding and compassion between lenders and borrowers across the globe.

APPENDIX

Appendix A Information was obtained from the platform unless noted with an asterisk, where the platform’s website was used.

Total USD Does MFI Amounts take FX Funded Interest Fees Risk Can How often Location of As of paid to Charged through the Lenders Be are lenders Operations Name Activity Status HQ Operates March, 2011 Lenders to MFI Platform Repaid repaid? Commenced Diverse Loan Types around Kiva Microfunds the globe through Field Non-Profit USA Global $210,000,000 No No Stop Loss Yes Monthly 2005 Partners Direct loans to micro and East Africa & MyC4 small businesses Profit Denmark $18,000,000 Yes No No Yes Monthly 2006 Ghana via Providers Diverse Loan Types around Babyloan the globe through Field Non-Profit France Global $2,300,000 No Yes No Yes Monthly 2008 Partners Diverse Loan Types to Rang De Non-Profit India India $1,000,000 Yes No No Yes Monthly 2008 borrowers in India

Diverse Loan Types to Czech MyELEN Profit Regional $900,000 Yes Yes Sometimes Yes Yearly 2007 borrowers in Latin America Republic

Education Loans for Vittana Foundation Non-Profit USA Global $575,105 No No Yes Yes Monthly 2009 Students around the globe

Diverse Loans for borrowers Acceder * Non-Profit USA Global $500,000 No No NA No NA 2008 made through donations Diverse Loans for borrowers Wokai in China made through Non-Profit USA China $380,000 No No No No NA 2007 donations Person to Project loans and Zafen Non-Profit Haiti & USA Haiti $315,000 No No No Yes Monthly 2010 donations in Haiti Diverse Loan Types for borrowers in India under a Monthly or United Prosperity Non-Profit USA India $200,000 No Yes No Yes 2009 loan guaranty model that is Quarterly funded by local banks Diverse Loan Types through At Maturity of Good Return Non-Profit Australia Regional $110,000 No No No Yes 2010 Field Partners Loan

12 or 18 51Give Rural Green Loans in China Profit China China $101,000 Yes Yes No Yes 2007 months Diverse Loan Types around Deki the globe through Field Non-Profit UK Global $100,000 No No No Yes Monthly 2008 Partners

Diverse Loan Types in the As Loan is Lend For Peace Non-Profit USA Regional $40,000 No No Yes Yes 2009 West Bank Repaid

Diverse Loan Types to Xetic Non-Profit France Africa $40,000 No Yes Euro/CFA Yes N/A 2010 borrowers in Africa Diverse Loan Types around At End of MicroWorld the globe through Field Non-Profit France Global $25,000 No Yes Yes Yes 2010 Loan Term Partners Health, Sanitation, Hybrid: For Education, Energy and Milaap Profit & Non- India India $25,000 No Yes No Yes Monthly 2010 Microfranchisee Loans in Profit India Diverse loan types made as donations for microfinance Unida Vida borrowers or community Non-Profit Netherlands Global $8,255 No No Yes No NA 2009 development projects around the globe Loans or scholarships for K- Janta * Non-Profit USA Global NA No NA No Yes End of term 2009 12 students and beyond

Diverse Loan Types to Austria & MyMicroCredit Non-Profit Regional NA No No Yes Yes NA 2009 borrowers in Latin America Germany Diverse loan types to Mid-Loan & Veecus * borrowers around the globe Profit France Global NA No Yes Yes Yes 2009 End of Loan through Field Partners Diverse Loan Types made Dvelo * as donations around the Non-Profit USA Global NA No Yes NA No NA 2010 globe through Field Partners Group loans to women Inuka Non-Profit UK Africa NA No Yes No Yes Monthly 2011 owned businesses

Appendix B

The 2009 CGAP report, “Microfinance Managers Consider Online Funding: Is it Finance, Marketing, or Something Else Entirely”, raised several very valid questions regarding the Indirect P2P model. These questions are paraphrased below along with learnings from the sector to date.

1. Can online lending platforms be counted on to provide funding in the amount and at the time when needed?

The continuity of Indirect P2P funding seems assured with over $230 million raised to date of which some 90% has been done on an interest-free basis.

2. Who bears foreign currency risk?

Approximately half of Indirect P2P platforms create currency risk for their field partners of which the sector’s largest participant (Kiva) provides stop-loss protection. The second-largest participant, MyC4, does not create any currency risk for its partner MFIs.

3. Will the online lending platforms manage abrupt shifts in funding patterns?

Abrupt shifts in funding have not occurred at Kiva, the largest Indirect P2P platform. However, Kiva does not have a back-up line of credit or loan fund that could be used if funding patterns fell drastically and it is unlikely that other platforms do.

4. How will other funders to an MFI view inclusion of an Indirect P2P Platform in the capital structure, not knowing how they will react in times of MFI distress?

To date, there has been no general negative reaction by more traditional funders to inclusion of Indirect P2P platforms in a capital structure. Such platforms should be responsible participants on inter-creditor issues for troubled field partners. As has been noted with regard to Nicaragua and CRAN, Kiva lenders can be very supportive of riskier environments.

5. What is the operational cost for the MFI in working with an Indirect P2P Platform?

Preliminary information gathered by Kiva indicates operational costs for participant MFIs are generally no more than 4%, and are often lower. Costs can decline as participant MFIs gain experience with an Indirect P2P platform. Mobile payments and MIS integration can also lead to further costs savings in the future.

6. How is consumer protection handled?

Kiva requires field partners to represent that client waivers are being used and tests for its usage on a small sample of borrowers as part of a borrower verification process. When necessary, borrowers faces are blurred on Kiva and private information, such as location, eliminated. To ensure privacy required under some local laws, defaulting-borrower data can be restricted to only Kiva users who lent to the defaulted borrower.

7. Are anti-money laundering and anti-terrorist financing requirements met?

Kiva does not source cash funds directly from lenders and only allows PayPal, credit cards or checks to be used for payments. Participant MFIs and key staff are vetted under the OFAC Specifically Designated Nationals (SDN) list in order to become an eligible participant MFI.

Endnotes

I Network for Good website, http://www1.networkforgood.org/about-us, last verified 7-5-11.

II Person to Person Lending, Is Financial Democracy a Click Away? US AID September 2008

III Zopa Website, http://uk.zopa.com/ZopaWeb/public/about-zopa/press-office.html, last verified 7-5-11 and translating GBP 135 Million at 1.61 USD/GBP

IV Prosper Website, http://www.prosper.com/about/, last verified 7-5-11

V Lending Club Website, https://www.lendingclub.com/public/about-us.action, last verified 7-5-11

VI Kiva Website, http://www.kiva.org/about/stats, last verified 7-5-11

VII MyC4 Website, http://www.myc4.com/, last verified 7-5-11and translating EUR 13.5 million at USD/EUR 1.44.

VIII Microplace Website, https://www.microplace.com/howitworks/risk, last verified 7-5-11

IX Burand, Deborah, Microfinance Managers Consider Online Funding: Is it Finance, Marketing, or Something Else Entirely?, April 2009

X Lend for Peace Website, http://www.lendforpeace.org/content.php?MQ==, last verified 8-7-11

XI Wokai Website, http://en.wokai.org/about, last verified 7-5-11

XII Zafen Website, https://www.zafen.org/en/about/faq, last verified 7-5-11

XIII MyC4 Website, http://www.myc4.com/Invest/AboutInvesting, last verified 8-14-11

XIV Babyloan Website, http://www.babyloan.org/fr/microfinance/le-modele-economique, last verified 10/1/11

XV MyC4 Website, http://www.myc4.com/Invest/AboutInvesting#RISK_WHEN_INVESTING, last verified 10-1-11.

XVI Kiva Website, , http://www.kiva.org/about/risk/field-partner-role, last verified 8-7-11

XVII Wokai China’s First International Giving Website, power point presentation (s3.wokai.org/resources/presentations/general_presentation.ppt)

XVIII Wokai Website, http://en.wokai.org/terms, last verified 10-1-11

XIX Janta Website, http://www.jantaloans.org/what, last verified 8-7-11

XX Vittana Website, http://vittana.org/about/faq#do-you-offer-loans-to-younger-students, last verified 8-7- 11 XXI Energy In Common Website, http://www.energyincommon.org/about/abouteic.cfm, last verified 8-7-11

XXII Microcredit Enterprises Website, http://www.mcenterprises.org/the-impact/global-reach, last verified 10-1-11

XXIII Burand, see Endnote IX

XXIV Microfinance Banana Skins 2011, The CSFI survey of microfinance risk, published by the Center for Study of Financial Innovation, February 2011. (http://www.cgap.org/gm/document- 1.9.49643/Microfinance_Banana_Skins_2011.pdf)

XXV Roodman, David “Kiva is Not Quite What it Seems”, October 2, 2009 http://blogs.cgdev.org/open_book/2009/10/kiva-is-not-quite-what-it-seems.php

XXVI Strom, Stefanie Confusion on Where Money Lent via Kiva Goes New York Times, November 8, 2009. http://www.nytimes.com/2009/11/09/business/global/09kiva.html

XXVII Roodman, endnote XXV

XXVIII Boober Failure Hurts Lenders, P2P Banking.com, June 15th, 2009 http://www.wiseclerk.com/group- news/category/services/boober/

XXIX Working Capital for Community Needs, WCCN's Newsletter, Spring 2009, Volume 25, No. 1, http://www.capitalforcommunities.org/node/427

XXX MacFarquhar, Neil “Banks make Big Profits from Tiny Loans”, New York Times, April 13, 2010 http://www.nytimes.com/2010/04/14/world/14microfinance.html?_r=1

XXXI Kiva Blog, New York Times Article on Microfinance Interest Rates and Pricing, April 15, 2010 (http://www.kiva.org/updates/kiva/2010/04/15/new-york-times-article-on-microfinance.html

XXXII Inventure Website, http://inventure.org/about/faqs, last verified 8-14-11