Kiva Versus MYC4

Social Innovation Centre

Kiva versus MYC4:

Business Model Innovation in Social Lending

06/2009-5595 This case was written by Anne-Marie Carrick-Cagna, Research Associate, and Filipe Santos, Assistant Professor of Entrepreneurship, INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The financial support of the BANESTO Foundation to the INSEAD Social Entrepreneurship Initiative is gratefully acknowledged Copyright © 2009 INSEAD

Social Innovation Centre

“Business must be for profit but profit must also be for purpose.”

Mads Kjaer, co-founder of MYC4.

“What really matters are the social results – the social impact, how many people we reach and how many lives we change.”

Isabelle Barres, Microfinance Partnerships Vice President, Kiva.

Kiva and MYC4 are person-to-person lending organisations1 that share the goal of eradicating poverty worldwide through microcredit. Kiva was founded in 2005, following a trip to Africa by Matt and Jessica Flannery. It is an online platform that allows individuals in the developed world to make loans to micro-entrepreneurs in the developing world. Based in San Francisco, Kiva was the world’s first online micro-lending platform and is constituted as a not-for-profit organisation. By October 2008, three years after its public launch, Kiva had funded a total of 67,543 loans from 353,543 lenders, worth over €38 million.

MYC4 was founded in 2006 as a joint venture between Mads Kjaer from the Danish Kjaer Group and Tim Vang, an entrepreneur. Its mission is to raise capital for African entrepreneurs via an online marketplace and become a “significant tool in the fight to end extreme poverty”. It is a for-profit organisation based in Copenhagen, Denmark, with an overseas IT development centre located in Kampala, Uganda. By October 2008, one year after its public launch, MYC4 had funded 3,079 loans from 6,885 investors worth over €5 million.

Both organisations have poverty alleviation as their central objective and strive to bring together the growing socio-economic trends of social networking and microfinance. They exploit the power of social networks to cater directly to individuals in the developed world as lenders for the platform, while partnering at a local level with microfinance institutions (MFIs) for the sourcing of borrowers and the management of loans.

Microfinance has become a fast growing global movement and a subject of much debate in the media and finance fields. While supporters claim that microfinance is a powerful tool to eradicate poverty, sceptics question what difference micro-loans can make in reducing poverty at a macroeconomic level. They argue that the current loan volume in microfinance ($25 billion) is not nearly enough to make a significant dent in global poverty. They also argue that its business model is not sustainable. From the estimated 10,000 MFIs that exist, less than 2% are believed to be commercially viable. The majority are dependent on government and private grants to be able to develop their activities.

Person-to-person lending is an innovative business model that can perhaps provide a way of leveraging microfinance’s ability to fight poverty. Or is this notion just a foolish dream given

1 Person-to-person lending (also known as peer-to-peer lending, P2P lending, social lending or social financing) is a novel development in the financial world. It is the name given to financial transactions that occur between individuals in that the lender has a say in choosing the borrower. There are broadly two types of P2P lending: the commercial oriented companies such as Zopa and Prosper that provide unsecured loans for consumers and small businesses, and social oriented companies that help poor people obtain small loans to develop or grow a micro-business, usually in developing countries.

Copyright © 2009 INSEAD 1 06/2009-5595 Social Innovation Centre the tiny amounts invested through P2P models so far? What role can P2P lending companies, such as Kiva and MYC4, play in making the microfinance industry more sustainable?

And if they can play a role, what is the most effective approach to building the P2P social lending market? Although they have similar goals and value propositions, the two ventures have very different identities and business models (see Appendix 1). Kiva is a not-for-profit venture that offers no interest rates to lenders and relies on a network of volunteers worldwide to perform key activities. It has created an eco-system that mixes the entrepreneurial daring of Google with the ‘do-gooder’ ethos of people like Bono, the lead singer of the rock band U2. MYC4, in contrast, approaches micro-lending as a business proposition for all its stakeholders. It pays a return to lenders and employs a reverse auction system that determines the interest rate they receive in a transparent way. It is a for-profit venture that aims to become the first company “serving the world and owned by the world”. Which business model is more scalable and capable of generating widespread impact?

Microfinance and Poverty Eradication

“Let’s put poverty in the museum.”

Muhammad Yunus, founder of the Grameen Bank.

In response to the problem of global poverty, the United Nations (UN) defined eight Millennium Development Goals in its September 2000 declaration (Exhibit 1). Among them the resolution “to halve, by the year 2015, the proportion of the world’s people whose income is less than one dollar a day and the proportion of people who suffer from hunger and, by the same date, to halve the proportion of people who are unable to access or afford safe drinking water.”2 By 2006, almost halfway through the time given for achieving the goals, the UN announced it was unlikely that sub-Saharan Africa would succeed. There were approximately 770 million people living in this region, almost half of which survived on less than $1 per day. To reach the goal of reducing poverty the pace of improvement would need to be doubled. Kofi Annan, UN Secretary General at the time, was optimistic for the future and looked for realistic solutions: “There is a growing global consensus that we can reach the Millennium Development Goals but only if business is part of the solution.”

Microfinance is considered by many as one of the ways to achieve these goals. It is a means of providing poor people with small loans (microcredit) at reasonable interest rates. The concept of microfinance has existed for centuries with savings and credit systems such as susus in Ghana, chit funds in India, tandas in Mexico, arisan in Indonesia, and the original “credit union” model in Europe and the US. Yet in the post second world war financial order, bank lending became the dominant credit provision model. Unfortunately, banks ignored the poor as potential clients because they could not offer collateral or provide guarantees, did not have credit histories, were deemed unreliable payers and the loans they requested were too small to cover the bank’s costs of providing them.

During the mid 1970s and 1980s, social entrepreneurs and organisations worldwide began experiments to make financial services available to the poor at affordable rates. The early and

2 United Nations General Assembly, declaration 18 September 2000.

Copyright © 2009 INSEAD 2 06/2009-5595 Social Innovation Centre most successful of these experiments took place in Bangladesh, with two pioneering microfinance institutions, BRAC and the Grameen Bank, leading the way. Grameen Bank, founded in 1983 by economics professor Muhammad Yunus in Bangladesh, became the most well known MFI worldwide. Its origins dated back to 1976, when Yunus decided to lend a total of $27 to a group of 42 impoverished villagers as an experiment in poverty alleviation. This was the money they needed to develop micro-business activities (for example to buy bamboo to make the stools they made for a living). They were all able to pay him back with a small amount of interest – showing that the model worked on a small scale.

Thirty years later, the Grameen bank reaches 97% of all villages in Bangladesh, providing microcredit to 7.56 million borrowers, 97% of whom are women. Interestingly, the majority of microfinance borrowers worldwide are women (84%).3 Although this is partly because so many women are unemployed worldwide, the most important reason is that women have proved to be more likely to repay their loans on time. Women are also more likely to use profits from their small business to enhance their family’s wellbeing through healthcare, nutrition or education. They are also more effective at maintaining the support peer groups that often underlie the microfinance model.

As a result of the success and growing legitimacy of these pioneers, the number of microfinance institutions has increased rapidly over the past 20 years. MFIs are located primarily in developing countries and vary in sophistication, philosophy, scope of services and scale of operations. However, microfinance is still a fragmented field with the vast majority of MFIs being small and unsophisticated providers of loans. About 150 MFIs, however, called the Tier 1 organisations, are large and professionally run. In addition to providing small loans to the poor, they often provide other financial services such as micro- insurance, micro-mortgages, savings products, as well as educational and health services.

Most of the MFIs in the early years were funded by private or government grants. By the 1990s, many MFIs realised that growth would be unsustainable if they continued to depend on donations. In response, some institutions restructured their operations with the aim of attracting institutional investors. A watershed event was the IPO in 2007 of Mexican microfinance bank Compartamos, valuing the company at $1 billion. This move caused controversy since many feared that the social goals of microfinance could be jeopardized by an inflow of professional money searching for profits4.

An alternative to raising professionally invested funds would be for MFIs to tap into the vast amount of personal savings in the developed world as a source of funds. This is exactly where the new business model of person-to-person social lending can play an important role. Kiva and MYC4 are the pioneering ventures in this space and the reference models for others.

3 www.microcreditsummit.org/pubs/reports/socr/2006.htm. 4 This debate is covered in a companion INSEAD 2009 case called: Commercial versus Social Markets: The Compartamos Debate and the Battle for the Soul of Microfinance

Kiva – the Beginning

Kiva’s Mission: “Loans that change lives. Kiva lets you lend to specific entrepreneurs in the developing world - empowering them to lift themselves out of poverty.”

Kiva was founded in March 2005 by Matt and Jessica Flannery. The Kiva story, however, began earlier in 2004 when Jessica left her newly wedded husband to conduct impact evaluation surveys for the Village Enterprise Fund in East Africa. She had been inspired by a speech given by Muhammad Yunus at Stanford University and decided to pursue a career in microfinance. Matt, meanwhile, stayed in the US and continued his work as an engineer at TiVo, spending most days thinking up new business ideas in his quest to become a Silicon Valley entrepreneur. Matt later joined his wife for a two week trip in what turned out to be the main inspiration for Kiva. During his time in Africa, Matt filmed some interviews that Jessica was conducting with local entrepreneurs who had received grants of $100-$150 to start up small businesses. The couple were touched by how these small loans could have such a great impact on the living standards of these people. They heard stories from people who could now sleep on mattresses instead of dirty floors or buy fresh fish for their family.

Matt and Jessica returned from East Africa and reflected on what they had learnt during their time in the field. They both realised that the developed world was, in fact, more connected to the developing world than most people believed – it had been relatively easy for Matt, based in San Francisco, to reach Jessica on her mobile phone in rural Africa. They also saw how entrepreneurial people were in the developing world and what a powerful tool their stories were for connecting people.

With these thoughts in mind they began to look at ways “ordinary” people in developed countries could connect with, and invest in, rural African entrepreneurs. Their idea was to create a website where people could give micro-loans to individual borrowers in the developing world. Jessica worked on the business plan while Matt began looking at the technical structure and the website. The business plan “forced us to think about costs, revenue and most importantly our plan for growth,”5 Matt explained.

They also started to approach people working in the field to discuss the idea. Unfortunately every microfinance and NGO expert whom Matt and Jessica approached said the concept would not work. They argued that individuals would not invest and, even if they did, the cost of managing many small transactions would be very high. For example, in the summer of 2004 they had a meeting with Unitus, a “microfinance accelerator”. Matt and Jessica presented a 10-page feasibility plan for “Kesho.org” the original name for Kiva that meant “tomorrow” in Swahili. The plan discussed how the venture and non-governmental organisations would work together and how Kesho would cap the interest rate charged to borrowers at 5% and would offer lenders interest income. Having listened attentively and questioned Matt and Jessica in detail, the Unitus advisor pointed out what he believed was the major concern: how would they scale the business? He explained that there was an historical tension between efficiency and the donors’ desire to know where their money went. There

5 Kiva and the Birth of Person-to-Person Microfinance. Matt Flannery. Innovations. Winter and Spring 2007

Copyright © 2009 INSEAD 4 06/2009-5595 Social Innovation Centre would have to be a cost effective way of tracking the money – “How would we track the amounts involved when we were proposing loans as small as $25?” Matt asked himself.

The next issue to address was the status of the company: should it be a charity or a commercial business? Matt attended microfinance events and heard the recurring theme of the commercialisation of microfinance institutions – if they were to have a significant impact on world poverty, it was claimed, MFIs would have to be integrated into the global economy and tap into capital markets. However, this argument was contrary to what Matt was hearing from internet users. Indeed one of the surveys they carried out showed that 50% of the users would not lend to the site if Kiva adopted a for-profit model. He explained:

“Rather than try to attract the most capital we could, we were interested in engaging average-income people to unlock a new type of connected capital. Thus we weren’t trying to compete in the commercial investment fund game; rather, we wanted to get individuals who had never heard of microfinance into the mix.”6

This raised the question of how P2P lending could fit into the microfinance world. Matt and Jessica knew that most MFIs did not qualify for commercial grade investment and relied on donations during the early years of existence. This, however, made it tricky to later move into capital markets. It was becoming clear to Jessica and Matt that P2P lending could be a bridge for MFIs to move away from donor dependence and draw on capital markets.

When Matt and Jessica talked to their friends and colleagues about the new venture many were sceptical and even doubted the legality of sending money over the internet to someone in Africa. But Matt was adamant: “I read all the policy and case law on it and I couldn’t find anything that said it was illegal. So we just started doing it.”7 While Matt began to actually build the website that was hosted on his personal domain, Jessica visited legal companies in San Francisco campaigning for their support. All 30 law firms she visited refused to work with them because of the unclear securitization territory they were entering into. The Securities and Exchange Commission (SEC) defined what made up a security and if it ruled that securities were being issued they had to comply with a list of requirements. Among these were that products should be sufficiently collateralised and invested in entities that complied with US accounting systems. As Matt pointed out, the situation was ludicrous:

“We were trying to allow people to lend to a goat herder and a fish seller in rural Uganda. Surely our friend’s fish business didn’t comply with Sarbanes-Oxley!8”

Eventually Matt and Jessica decided to found the company as a charity with 501(c)(3) status:9

“Since the concept of online person-to-person lending didn’t exist, microfinance was less well known in the business community, and the model was highly experimental, we decided that 501(c)(3) status would help us form a bond with users and raise a small amount of capital to get the idea off the ground.”10

6 Kiva and the Birth of Person-to-Person Microfinance. Matt Flannery. Innovations. Winter and Spring 2007 7 “When small loans make a difference”, Knowledge@wharton, 06 03 2008 8 Sarbanes-Oxley was the Public Company Accounting Reform and Investor Protection Act of 2002 9 This is a tax law provision that grants exemption from federal income tax to non-profit organisations. 10 Kiva and the Birth of Person-to-Person Microfinance. Matt Flannery. Innovations. Winter and Spring 2007.

The process was complicated as they wanted to set it up based on a lending model and not donations; something that had not been done before. By this time, Jessica’s search for legal help had finally paid off. Kiran Jain, a young lawyer based in San Francisco, had offered her help. And so began the tedious but necessary process of completing the many application forms. At the time they still had no funding and most of the feedback they were getting from experts was still dismissive of the concept’s legality and scalability. As Matt explained, “All the questions posed by our model, at this point, seemed intractable and a reasonable set of answers would require a million dollar investment in legal fees.” Finally, nine months after their original trip to Africa they decided to just start and see how things would play out:

“My experience was that we spent way too much time writing a business plan and planning things. Since the idea was really impossible to project, we couldn’t really say what was going to happen and there was a tendency to over plan, so we did better when we planned less and tried more. The relationship between planning and acting should be highly skewed towards acting. The planning part should be iterative and an ongoing part of your process. What I learned is it’s better to do it continually as a living document rather than try to figure out all your problems upfront because we learned more in the first month after starting our business than we did in a year in terms of planning our business.”

Matt was still working as a TiVo engineer and started to build the first “beta” versions of the site in his spare time. Jessica too was employed part time in a local non-profit organisation and concentrated on setting up the company. As money was short, a logo was designed by a TiVo colleague in return for one of Matt’s electric guitars. Finally the name Kesho had met with a mixed response from colleagues and friends and so it was changed to Kiva, another Swahili word meaning “unity” or “agreement”.

The beta site was ready in early 2005 but it still lacked loan applications. Matt and Jessica called upon their friend Moses whom they had met in Uganda. He was a pastor from Tororo, a community leader and proficient internet user. They had stayed in contact with Moses since leaving Africa and he was ready to post and administer loans for seven entrepreneurs in his community. Among them was a fishmonger, a clothes reseller and a goat herder. Once these were posted, an email was sent to Matt and Jessica’s wedding invitation list – about 300 people in total were contacted. Within one weekend all seven of the loan requests were funded. They had managed to raise $3,500 in just a few days. Moses then began a blog about the seven entrepreneurs, known later as the ‘dream team’, giving updates on their activities. He sent this to all the people that had initially been contacted.

The next step was to post more entrepreneurs on the site and Moses was asked to find 50 qualified entrepreneurs in Tororo by October 2005. Once these had been found, the web-site was publicly launched and a press release was issued. For a month or so nothing much happened on the website. Then, one morning, Matt went to work as usual and there in his Kiva email inbox were almost 1,000 emails – they had raised $10,000 that morning and were “sold out” of loans to be funded.

Later Matt discovered that Kiva had been featured on the front page of one of the world’s largest blogs - the DailyKos. Over a million people had read about Kiva and hundreds of people were online discussing their organisation. The emails came from not only supporters but also MFIs from around the world that were interested in using the site as a platform to list

MYC4 – the Beginning

“It’s not charity, it’s business. And it’s helping”11

MYC4 was officially launched in October 2007, but the story began three years earlier when Mads Kjaer and Tim Vang shared a taxi by chance in London.

Mads was CEO of the Kjaer Group which was founded by Mads’ father, Christian, in 1962 as a Renault dealership in Denmark. The business took a turn in 1977 after Christian was approached by a fellow Dane to supply him with a reliable car that could be easily serviced as he was moving to Zambia as a voluntary worker. Christian provided not only a suitable car but also a range of spare parts that would ensure the car could be maintained regardless of where the volunteer found himself. Delighted with the service, the client sent his colleagues to Christian for cars. As a result of this unusual request the Kjaer Group business was formed and grew over the years. By 1989 the Kjaer Group concentrated its activities uniquely on the provision of transport solutions worldwide for humanitarian organisations. Mads joined the company in 1984 and worked for 22 years on the African continent, living in Zimbabwe, Uganda and South Africa. He is also the Honorary Consul for Ethiopia in Denmark.

Tim Vang, the co-founder of MYC4, is a serial entrepreneur and worked as a leadership coach in Denmark. He had a background in international marketing and a passion for social oriented organisations. In 2004 he joined the board of directors of the Happiness Foundation, a non- profit organisation that arranged pro bono consulting services for charities.

The two businessmen first met at Mads’ younger brother’s birthday in 2004. But it was not until six months later, due to a chance encounter, that they began the discussions that would lead to the creation of MYC4. In October 2004 they shared a taxi on the way to a conference in London because of a problem on the underground train system. Tim recalled:

“When we met it was like two soul mates meeting. There is a difference in age and skills. I was 32 and Mads 43. He had more traditional leadership skills with a vast knowledge and experience working in Africa. I had a business degree from Copenhagen Business School and had been involved in many start-ups but not with the internet, although it was always something that I was interested in. This taxi ride was fundamental to the future business! The three words we discussed were ‘people’, ‘entrepreneurship’ and ‘innovation’. Mads then added the words ‘a greater world’ and ‘Africa’ and I put in ‘internet’. From the beginning we have been inspired by the thinking behind the ‘triple bottom line’ including people, profit and planet. This holistic approach is MYC4 in a nutshell.”

Prior to their meeting Mads had been mulling over ideas of how he could use technology to do business in Africa “whilst doing good”.12 The elements he considered key were the

11 Extract from MYC4 video on ytube.com http://www.youtube.com/watch?v=V005L3PWhSE 12 Interview with Mads Kjaer, founder and CEO of MYC4, May 2008.

Copyright © 2009 INSEAD 7 06/2009-5595 Social Innovation Centre internet, the Millennium development goals and African enterprises. For Tim, however, Africa was a continent with negative connotations, as frequently portrayed through the media: wars, HIV, malaria, poverty – no one until then had ever mentioned to him the words ‘entrepreneurship’ and ‘Africa’ in the same sentence.

From October 2004 until January 2005 Mads and Tim discussed many different concepts and business models until they finally narrowed them down to just one – Care 4 Expats, an idea for an online platform supporting expatriates moving to an African country unknown to them. The site would give users the opportunity to connect with other expats and benefit from their experience and knowledge of local regulations, customs, products and services.

Care 4 Expats would become a venture run independently from the Kjaer Group, but would benefit from the parent organisation’s knowledge and networks. The concept sounded intriguing enough and Tim agreed to work for the Kjaer Group as Business Development Manager for ‘special ventures’, but just part-time, and only for six months. If things worked out, then Mads and Tim would need to set up an independent business structure. Tim started to refine the concept and devised a business model in which expats could use the site to search or shop, generating commission revenues that would pay the costs of running the site. Any surplus would be donated by the users themselves to an African micro-entrepreneur of their choice. While Tim did the business analysis, Mads did most of the travelling, crossing the globe to discuss the concept and receive feedback, speaking to hundreds of people, many of whom were based in Africa. This “collecting phase”, as Mads called it, took place from 2005 up to the summer of 2006 and helped fine-tune the business model.

The feedback was consistent – people liked the notion of helping African entrepreneurs but did not resonate with the expatriate focus of the website. The concept then evolved into a broader portal for connecting people in developed countries with African entrepreneurs. The name was changed to Care 4 Africa (C4A for short). However, most people associated the name Care 4 Africa with an NGO. This was not good as Mads and Tim did not want to have a traditional NGO but rather a social oriented for-profit business. When Tim pointed out to Mads that C4 was the name of a plastic explosive, Mads was enthusiastic: “That’s great! That’s just what we are – a potential energy waiting to explode and we need a detonator which is the internet.” They also needed “the human touch”. Tim explained: “That’s how the name MYC4 came into being, because it is people deciding what to do and whom to help.”

Mads decided to give up his full-time job by the spring of 2006 and focus his energy in the following months to develop a business plan for the venture. To obtain an external validation of their ideas, they commissioned a study of the viability of the MYC4 concept. The study suggested that they could explore two different segments. Tim explained:

“One was an online universe where small private investors like you and I can go and lend money to African entrepreneurs. But the study suggested that we also needed a fund in which institutional investors could invest. The consultants told us that we should forget about the individual investors and concentrate on the institutional ones and offer a financial product. But we were adamant and refused to abandon the idea of engaging with private lenders.”

In Mads and Tim’s view, MYC4 could solve two problems simultaneously by connecting individuals in the developed and developing world:

“There was the western world, where we predicted the capital market would go down and it would be difficult to get a return on investment that was greater than inflation. So we had to find a new market for this capital– Africa and the rest of the developing world. In the developing world demand for capital is larger than supply of capital and thus interest rates are driven up. If we could connect these two sides under conditions that were fair for both sides it would be fantastic!”

The mechanism for ensuring fairness was a Dutch auction system that the founders had stumbled upon earlier in 2005 when looking at eBay’s business model. The Dutch auction system is a reverse auction model in which providers of funds compete among themselves for the opportunity to lend, ensuring that the price goes down if there is more competition. With this mechanism the price-setting process is fully transparent and the borrower pays a fair interest rate that reflects market conditions. The MYC4 revenue would come from a 2% fee when a loan is made and 2% fee on the repayments, both paid by the African borrower.

In 2006 increasingly excited about the business concept Tim, Mads and the Kjaer Group put up €200,000 capital to found the company. Tim even sold his house and invested the proceeds in the venture. In December 2006 the Danish Government awarded MYC4 a start-up grant of €670,000. This meant they could start hiring the core team and develop the online platform. They took on a Danish graphic designer who had worked for an electronics gaming company and a programmer that had developed Lego’s webpage. Tim also hired a friend who owned an IT company in Denmark: “We needed someone in-house that understood exactly what we wanted to do – this system architect understood 110%.”

While they worked on the online side of the business, Mads and Tim, hoping to attract potential partners, continued to talk to various experts from MFIs, banks and other institutional investors about the concept of MYC4 as a platform that offered loans to African entrepreneurs. The response was always the same: “Great idea but come back when you’ve proved it works.” In February 2007, they were in a tricky position – they had planned to launch MYC4 by May 2007 but could not progress further until they had a local African partner. Mads was advised by two people in his network to contact Robert Wakabi, a Ugandan serial entrepreneur. Tim met with Robert two weeks later.

“Robert liked the idea of capital to build Africa and taking it to the next level – but he wasn’t sure exactly how it would happen. The difference between Robert and the other 400 people we spoke to was that Robert was ready to take action.”

Robert decided to act as a Provider for MYC4 by creating “The Foundation for Entrepreneurship Development Uganda” (FED), a non-profit organisation committed to improving “the quality of life in enterprising local Ugandan communities through helping them access affordable credit and business counsel.” FED’s role was to source borrowers, do due diligence, provide mentoring and manage borrower’s online information. Robert also created Capital Micro Credit (CMC) an authorised microfinance institution to issue loan contracts and handle payments, becoming MYC4’s first authorised loan administrator. With FED and CMC established as local partners, sourcing and screening borrowers, MYC4 was ready for business. A closed beta site was launched on May 1 2007 and immediately received a good response from the “friends, family and fools” who became the first users and funded the initial loan portfolio. MYC4 was up and running although not all pieces of the system were in place – “The first distribution of funds was carried out by one of our team who

Copyright © 2009 INSEAD 9 06/2009-5595 Social Innovation Centre literally went to the lender with a briefcase full of money!” The public launch of MYC4 took place in October 2007 when the system was fully set up and the second provider joined the platform.

The Growth of Kiva

Now that Matt was working full-time on Kiva he set about building a team “to help turn the project into an institution”. A key person was Premal Shah, a friend of Matt who had been an early supporter of Kiva. Premal was Product Manager at PayPal, a payment system that eBay had bought in 2002. He had recently returned from a sabbatical in India where he had worked with a microfinance institution. There he had the idea of posting micro-borrowers on eBay. He did not wait for permission and went ahead but the loan applications were removed quickly by the eBay website’s administrators. For Matt and Jessica, Premal was the missing piece of the jigsaw.

“Jessica and I were confessional, careful, thorough, strategic and technical. Premal was passionate, charismatic, brilliant, wildly enthusiastic and reckless. That’s what we needed to take this organisation to the next level.”

Premal left his job at eBay to join Kiva as president, a move that eBay supported by allowing Kiva to use Paypal’s payment processing system free of charge. Soon they were joined by others who were passionate about the Kiva concept. A friend, Chelsea, who had worked in finance, became the director of partnerships. A married couple, Jeremy and Fiona, joined the team on their return from Tsunami-devastated Thailand where they had read the article on the Daily Kos. Another friend, Krista, a public relations expert, worked with them on the communications side. Matt described the team’s situation and motivations:

“I soon found myself surrounded by a tight group of true believers. We all worked out of Premal’s house for about six months. Some of us were sleeping on his couch. We were a team with a mission. It was really stressful because there was an increasing amount of money coming into the website but we didn’t have a system sophisticated enough to track every dollar. Also, we were turned down by every bank that we wanted to work with. We were in fact unbankable.” 13

As a result they had to put the funds gathered from lenders through Kiva into Matt’s personal checking account. Eventually they managed to open a business checking account at Wells Fargo simply because Matt had his own account there.

Once the Daily Kos picked up on Kiva’s activities, the rest of the media followed, albeit slowly at first. Internet traffic went from an average of 320 hits per week at the beginning of October 2005, to 7,261 hits following the Daily Kos piece. An article appeared in the Wall Street Journal a few months later generating another boost of interest and publicity. Their growing media exposure meant that they had no difficulty in raising funds to lend. On the contrary, the key bottleneck in the system in late 2005 was finding enough entrepreneurs in developing countries. First they tried to internalise the activity by setting up their own MFI in

13 Interview with Matt Flannery, co-founder of Kiva, May 2008

Copyright © 2009 INSEAD 10 06/2009-5595 Social Innovation Centre key geographies. However this idea did not work. They did not have enough field expertise to directly manage local people employed by Kiva.

“At first we tried to start an MFI in Uganda and connect it to the internet – this was a vertically integrated business model. However, it turned out to be nightmare to run an MFI remotely. I wasn’t good at running an MFI and I couldn’t manage local African people over the phone. Eventually I started distrusting them and then there was a fraud and I had to sue the people involved.”

Interestingly, MFIs worldwide soon started to contact Kiva and asked to partner with the venture. The first few partnerships did not follow any systematic process. Matt explained:

“We would say ‘yes’ and just start working with them. I wrote up a contract and signed it with people I didn’t really know. We had to trust people we met such as an Ashoka Fellow in Uganda, a Peace Corps volunteer in Bulgaria, a Cornell graduate student in Senegal – friends of friends and people we trusted. We didn’t have the money to do due diligence.”14

In 2006 Kiva began working with more established MFIs. This was mainly thanks to Premal, who persistently knocked on the doors of these organisations and arranged “meeting after meeting”. These new partners plugged in selected clients from their own loan portfolio to the Kiva platform. This alleviated the constraint on the borrower side of the platform, allowing Kiva to channel the increasing amounts of funds available to lend.

In the middle of 2006, however, the organisation experienced a funding crisis because Kiva’s costs were rising faster than revenues. Kiva’s revenue model was (and still is) based on donations from its lenders and represents roughly 6% of loan disbursements. Matt explained:

“Despite being a not-for-profit organisation our margins are good so far. We ask our lenders when they make a loan if they want to pay an additional 10% as a contribution to Kiva’s operational costs. They can opt to pay less or nothing at all. This is on top of the amount they have loaned: so for a loan of €100 they would transfer €110. Most people press the ‘opt in’ button when they make their initial loan – ‘old time’ lenders are less inclined to do this repeatedly.”

In addition to the revenue from lending, in their first year they also received $125,000 in start- up grants, some of which came from experienced angel investors on the newly assembled board of Kiva. However, facing short-term cash constraints due to rising costs, they considered venture capital funding, “patient capital”, and even “blended value investors”, but decided against them all because of Kiva’s non-profit status. At the October board meeting, Matt announced that they might not make payroll as they were down to just $15,000. He suggested Kiva become a for-profit company to be able to raise venture capital. This was unanimously rejected and one board member offered to provide funds should Kiva reach zero, to keep the venture afloat.

During this crisis Jessica and Matt returned to East Africa and filmed a documentary for Frontline World on PBS. After the 15-minute documentary was broadcast it generated so

14 Interview with Matt Flannery, co founder of Kiva, May 2008.

Copyright © 2009 INSEAD 11 06/2009-5595 Social Innovation Centre much publicity that the volume of loans increased tenfold from $3,000 per day to approximately $30,000 in 2007. They were never short of cash again, since the media coverage continued to improve. In September 2007 the former US President Bill Clinton highlighted Kiva in his new book “Giving”. This endorsement led to a widely seen television segment on Kiva with Bill Clinton, Matt and Jessica in Oprah Winfrey’s famous show. In addition, a New York Times columnist, Nicholas Kristof made loans through Kiva and then travelled to Afghanistan to meet two of his borrowers - a baker and a TV repairman. “Websites like Kiva are useful because they connect the donor directly to the beneficiary, without going through a bureaucratic and expensive layer of aid groups in between.”15

Kiva experienced other growing pains. In early 2007 some loans did not reach the African entrepreneurs they were destined for due to a fraud of one of their most trusted field partners. Matt reported the incident in his blog on the Kiva site. “We had a disastrous fraud on the website in the beginning 2007. The local partner in Uganda stole much of the money that was loaned. Kiva reimbursed the money to the lenders and took the losses. The reaction from the press and bloggers was resignation – “That’s life” – and appreciation for the transparency exhibited by Kiva. As Matt observed: “When things seem perfect people are sceptical.”16

Still, it was clear that Kiva needed to further improve its risk management and due diligence process. In addition to this fraud, the company experienced some partnerships that had “ended poorly”. The official policy when this happened was that the lenders would lose their money, but in the first two cases when it occurred Kiva preferred to refund the money and write it off as a loss to protect the company’s reputation. On the third occasion, however, they did not reimburse the money as it would not be a sustainable practice.

In 2007 the company professionalised more of its areas. Jennifer Hamilton, an INSEAD MBA graduate, with experience in investment banking and a passion for social entrepreneurship, was hired as CFO. In addition, a dedicated microfinance team was established to improve partner management and better scale the platform on the MFI side. In 2008 this team began to develop a rating system for MFI partners (see Appendix 4) so that lenders could make their own decisions on whom to trust. The lender also assumed the risk of the individual borrower defaulting. Fortunately, defaults were not a major concern with the repayment rate at 98%.

A unique feature of Kiva is its large network of volunteers who are vital to the organisation’s operations. As Matt notes: “Our business model is hard to pull off without volunteers. In one way we’ve survived by using a network of volunteers. People just emailed us and offered their services free of charge.” There are between 350 and 400 voluntary editors and translators that work for Kiva throughout the world at any given time. Their role is primarily to read through the entrepreneurs’ stories, translate them into English when needed, and check for any potential mismatch between story and picture. There are also volunteers that work under the Kiva Fellows programme. Isabelle Barres, Vice-President for Partnerships, explains:

“Kiva sends out people into the field from 4 to 16 weeks to work with our partner MFIs. They mainly help with selecting and posting the profiles. They assist with writing the stories or updates. They have also played a role in risk management.

15 The Importance of Good Press, Time. 16 Mercurynews blog on www.siliconvalley.com, 2008.

As we improve our due diligence they have helped to collect information and are also important in communicating with the MFIs if any issues arise.”

In 2008 there were 40 unpaid fellows in the “field” working for Kiva. They are trained at Kiva headquarters in San Francisco before being sent out to work with the MFIs. Isabelle continued: “We have three training sessions per year. We want the fellows to come to us so that there is cohesion. We have also hired a Fellows Programme Manager to help with this.”

Although volunteers are crucial to Kiva’s operations, Matt is clear on the core activities:

“Anything that we consider essential we pay people to do - this includes engineering, due diligence, customer service, legal work, financial accounting among others. I wouldn’t put any of these activities, in particular engineering, which is essential to our business into the hands of someone outside the company who is not close to us because it’s who we are – we are an internet company so if we outsourced the IT we would be outsourcing our core competency.”

In terms of governance processes, Kiva is overseen by a board of directors chaired by Matt. The board may elect additional board members and has the power to remove a member by majority vote. It meets every two months and the two executive members on the board, Premal and Matt, discuss the burning strategic issues of the moment for the Board’s decision.

By September 2008 Kiva had reached $60,000 of loans per day and had become a well known brand in the US and the recognised global leader in this market space of online social lending.

The Growth of MYC4

After its successful beta launch in May 2007, MYC4 was ready to grow its operations. The founders had decided to focus on the bottom of the meso-segment of the business lending market, usually covering loans higher than €1000. This segment represented entrepreneurs who already had small businesses but lacked access to growth finance. MYC4 also targeted the top end of the microfinance market for loans between €500 and €1000.

A key challenge for MYC4 was to attract other players to become partners. Mads and Tim approached existing NGOs to become providers and established MFIs to serve as loan administrators. At that point they all refused, being suspicious of MYC4 and its new concept. The MFIs, as lenders, often viewed MYC4 as competition and therefore a threat – after all it was offering loans at a much lower interest rate. At this early stage of market validation these organisations could not yet see the benefits of collaborating with the new venture.

In Autumn 2007, Growth Africa Capital, based in Kenya, became MYC4’s second Provider. It brought many borrowers to the platform allowing MYC4 to launch the website publicly. Following this move, some of the larger organisations that Tim and Mads had approached earlier began to take notice. They realised that the MYC4 concept worked and they could see the advantages of becoming involved in terms of publicity and sourcing of cheaper funds. As the concept spread and gained legitimacy, more MFIs became interested.

“One of the reasons MFIs choose to work with MYC4, is not that it allows them to serve more clients, but that it allows them to better serve existing clients. Many of the MFIs larger clients’ financing needs have outgrown the MFI loan limits, so they can limit their exposure by co-lending to these clients with MYC4 lenders.17

Another challenge for MYC4 was improving and maintaining the IT infrastructure. At the time, many businesses preferred to outsource IT development to cheaper locations such as Russia, India or China. However, Mads and Tim knew that the IT platform was core to the model and so they were willing to invest in keeping IT in-house during the crucial development years. In line with the company’s African focus, MYC4 made the unusual decision to create an off-shore development centre in Uganda in mid 2007 and rely less on the Danish IT experts for coding since the initial platform was by then set up. The decision paid off as they found skilled people in Uganda with reasonable salary expectations.

All these developments resulted in MYC4 growing rapidly, becoming a more complex organisation and consequently more difficult to manage. In November 2007, Jes Colding, a seasoned international manager and personal friend of Mads, joined MYC4 to help with projects related to fundraising and investor management. When he arrived at the company he found a highly energised but stressful environment that had already taken its toll on some of the earlier staff members who had left the organisation. Jes explained:

“By the time I joined they had the initial proof that the concept could work. But the venture was struggling to make the transition from a purely entrepreneurial company into a fully fledged one, with clearly defined responsibilities.”

He soon became more involved and took over as COO in January 2008 with the primary responsibility of setting up and managing the other “face” of MYC4. Most people see only the online website but behind it lies the most complex organisational aspect of MYC4 – the offline African organisation. This involves creating and managing an eco-system of partners in Africa. It requires setting up systematic and reliable processes for ratings institutions whilst doing due diligence on borrowers (see Appendix 4 for more details). Given the complexity associated with the offline side of MYC4, the management team consciously decided to grow the company linearly for the first three years. As Jes explained:

“The value of the platform lies not just in being functional and fully operational but it now adds the value of the African network. We have so far funded 2,500 businesses but we are aiming for 5,000 by the end of 2008 and 40,000 by the end of 2009. We are experiencing an increasing interest from around the world because we now have a portfolio of interesting business projects with a network of proven and qualified partners in the field that work according to our guidelines. There has been no fraud on the partner side. We are sitting on something unique that adds to the balance sheet value of the company.”

As the venture continued to grow, the executive team realised the need to refine MYC4’s “product and make it much more flexible”. One example is the repayment system which was set up in a similar way to a monthly mortgage model. In Africa, however, as Jes explained,

17 “Person-to-person lending: is a financial democracy a click away?” Jennifer Powers, Barbara Magnoni and Sarah Knapp, EA Consultants, September 2008.

“People want to be able to reimburse the money when they can – not necessarily on a regular monthly basis.” Another key challenge is to develop the platform into a more ‘account centric’ and less ‘loan centric’ one since 50% of the borrowers apply for a second loan at least, if not a third or fourth. This would reduce the cost of due diligence and “help the companies grow step by step”. The venture also hopes to avoid the need for field providers in some situations and allow investors to use mobiles phones or other new technology to connect directly to the website. This would open up a new realm of possibility for the scalability of the model.

The Future of Kiva and MYC4

By October 2008 Kiva was working with 105 MFIs in 47 countries disbursing more than $60,000 per day in loans. Among the many challenges facing the company is the need to increase the transparency of the process. As Premal remarked, “We want to give more information on the social performance of the loans and more information on the MFIs.” He believes that the data on MFIs would be valuable not only for small lenders but also for larger backers such as governments and NGOs.

Another aspect that the company needs to address is its international expansion on the lender side, as well as continuing to innovate on the business model. As Isabelle pointed out,

“Kiva has been very much focused on the US market for sourcing funds. I’d like to make it a truly international organisation. Also, I hope that in three years time we will have a well-oiled machine that enables us to spend more time on innovation. We should experiment with the model we have and try new things such as having kiosks at existing MFIs or have other NGOs that are not microfinance organisations that are in contact with potential clients.”

Finally, Matt hoped to,

“…bring back the personal touch and to do that on a big scale. There are many ways we could go – we could offer interest rates to our lenders; we could allow borrowers to use our site directly in some situations – that would be a true direct person-to-person lending model. We could also expand into healthcare or insurance – there are many possibilities for development.”

By October 2008 MYC4 was working with 13 providers and seven lenders in eight African countries. The venture was no longer the fledgling one Jes had joined one year earlier. It had set up advisory boards in Iceland, Sweden and Holland to champion MYC4 in those countries. Further boards are envisioned for the UK and Kenya by the end of the year. By that time it aims to have 25,000 investors, facilitate investments of €12.5million in more than 5,000 businesses and set up operations in South Africa.

The company has great ambitions. MYC4’s aims “to become the first company in the world to be owned by the world”. In essence this would mean 6.6 billion shareholders owning one share each. The company received a boost at the end of October when the Industrialisation Fund for Developing Countries (CFU) and CSR Capital decided to invest €2.2 million in

Africa through MYC4. This was a considerable milestone for the company, as Mads noted in a press release:

“It is an endorsement of our initiative as a serious tool in the fight to eradicate poverty in Africa. We hope this will inspire other financial institutions, pension funds and companies to invest in Africa through MYC4.”

Business Model Innovation for Social Impact

By October 2008, person-to-person social lending surpassed US$50 million in cumulative loan volume. This amount, however, represents just a drop in the ocean of the fast growing microfinance industry. Microfinance loan volumes have risen from $4 billion in 2001 to more than $30 billion by 2007. Yet even this larger volume corresponds to only a tenth of the amount estimated that is needed to make an impact in reducing poverty worldwide.

If P2P social lending is to play a role in poverty alleviation, which venture is better positioned to make a difference: Kiva or MYC4? Which one has the more scalable business model? Or, perhaps, there are other business model innovations introduced by recent entrants (see Appendix 5) that would be more compelling. One example is Microplace, a social-oriented venture owned by eBay which has created an online marketplace for microfinance securities. In this business model, which is a variation in the P2P theme, individuals do not invest directly in specific micro-entrepreneurs but rather in interest-bearing financial securities issued by credible microfinance providers. This model allows MFIs to tap into the funds of individuals who wish to earn a rate of return on their investments but are also passionate by the potential impact of Microfinance.

Which business model design and innovations are likely to enable online social lending to reach the mainstream and have a significant impact in alleviating global poverty?

Appendix 1 The Business Model of Person-to-Person Social Lending

The creation of new markets often requires business model innovations. A business model is defined as the inter-connected system of activities and choices that creates value for particular market segments. It is usually developed from the point of view of a focal organisation but often transcends its boundaries since organisations may need to develop partnerships and engage closely with users to provide value, particularly in social oriented markets where resources are scarce and profitability unlikely. The P2P social lending model pioneered by Kiva and MYC4 brings a business model innovation to traditional banking since it involves direct links between individual providers of capital and individual recipients of capital, often in different countries. This is achieved through the use of an online platform. Lenders usually have a say on who receives their funds. Business models can be represented as an inter-connected system of activities, together with the choices that enable those activities to be performed in an effective way and create value. A simple illustration of the activity system of person-to-person lending is detailed below:

Figure 1. P2P Social Lending: Activity System

Money Profile created, Due diligence Sourcing of Transfer edited/translated Borrowers and sent to platform

Borrowers Brand Identity IT platform Loan Contract Money transfer marketing & (information) Issuance to borrower Communication

Matching System /

Micro-lenders Repayment of Borrower selection Loan in by lender installments Blogs stories from company and micro-lenders

Key activities in the value system include on the micro-lender side: developing a brand identity and marketing that attracts micro-lenders, setting up an online platform to facilitate interactions, doing the match-making, and keeping track of accounts. On the borrower side activities include: sourcing borrowers, doing due diligence, managing their profiles, as well as issuing loan contracts, managing the loan process and controlling the repayment process. It is the specific choices that are made about which activities will be developed in the system, by whom, and how they will be performed that determine a company’s business model.

Appendix 2 A Simplified View of How Kiva Works

Kiva works in a similar way to a networking site such as Facebook, with profiles of potential borrowers posted on the Kiva platform that include photos and a description of their activities This allows lenders to search by different criteria such as nationality, business type and level of need. The entrepreneurs, (the recipient of the loans or borrowers) are selected by the Micro Finance Institutions (MFIs) that work with Kiva, known as Kiva Field Partners. Once a lender has chosen the entrepreneur they wish to help, the money is sent via PayPal, free of charge, or via their credit card to Kiva. The minimum size of loan is US$25 and the maximum US$150. The amount is capped to allow more people to become involved with Kiva. On top of the loan the lender can voluntarily add a % amount to cover the operational costs of Kiva. The suggested percentage is 10% and about half the lenders are willing to contribute. These small loans can be combined with other loans to make a larger sum for the final amount lent to the entrepreneur. Loans can be made as an individual, part of a team or group or even as a company. Kiva then collects the funds through PayPal and forwards the money to the microfinance partner. The loans are processed through local microfinance organisations. These organisations also often provide training and advice to the entrepreneurs to help increase the business’ chance of success. Repayment and other updates are posted on Kiva’s website and emailed to lenders who wish to receive them. The MFIs assume the risk when currency rates fluctuate and charge an average interest rate of 20%-30% to the final entrepreneur. Kiva, however, pays no interest to the lender. The entrepreneur repays the loan during a period of six to 12 months via the MFI on a monthly basis. Once the loan is reimbursed the lender can then re-loan the money to another entrepreneur, donate their funds back to Kiva or withdraw the money. A Kiva Profile

Entrepreneur / Loan Country / Partner Description Activity Info Cambodia Mrs. Siem But, 25, sells chickens in the market. She buys

Siem But $200 them from raisers, who live in Toek Thla in the Banteay Hattha Kaksekar Meanchey Province. She travels with her husband to Limited (HKL), a Food Market 0% raised villagers' homes to purchase... more >> partner of Save the

Children

A Kiva Success Story: Yenku Sesay: From Survival to Success Yenku Sesay very nearly didn't survive May 6, 1998. On that day a rebel army, led by the Revolutionary United Front (RUF), invaded his village of Kondembaya in northern Sierra Leone, and cut off the hands of many of the villagers, including his own. According to the rebel soldiers, this was punishment for using their hands to vote for Sierra Leone's leader, against whom they were fighting. Yenku's father used the family savings to hire a motorbike to take Yenku for treatment in a hospital hours away in the country's capital city, Freetown. It took 3 days to find a motorbike they could use, and for these three days Yenku waited without any medial treatment. Due to the treatment he received at a hospital in the nearest city, Yenku eventually recovered from the physical wounds. In other ways, however, his life was destroyed. He was incapable of taking care of himself and eventually resorted to begging in the streets of Sierra Leone. At about 21 years old, Yenku's daily life had been reduced to asking for handouts, with little hope of change, little chance for something better. Yenku would still be begging today, had he not been approached by Salone Microfinance Trust (SMT), in 2006, about taking out a group loan with four other local borrowers. No other institutions were even willing to consider Yenku for credit because of his amputee status. However, through lengthy discussions with Yenku, SMT saw in Yenku natural business skills and a drive to be self-reliant. He was approved for 300,000 Leones from SMT, the equivalent of approximately $100 USD. Yenku used this money to develop a modest retail business. At first the business was no more than Yenku selling small items in the street, such as packaged biscuits, soaps, and other sundries. Over the past two years, by reinvesting the profits and building his credit with SMT, Yenku's business has grown to become a small shop selling an assortment of clothing, shoes, drinks, and other packaged food products. Yenku dedicated himself to his business, and every month he made his repayments on time and often early. With the profits from his retail business, Yenku has recently expanded into livestock and agriculture. The result is that Yenku is now self-reliant. Instead of being a burden to his family or the community, Yenku has become a provider. He is able to support his family. He can feed and clothe his three children. He sends both of his school-age children to primary school, and he even pays for his younger brother's education. Source: www.kiva.org September 2008

Appendix 3 A Simplified View of How MYC4 Works

All applications for loans originate from the MYC4 field partners and undergo a thorough investigation process to ensure that there are good economic prospects for growth. Once this process has been completed they are then classified as investment businesses on MYC4. MYC4’s partners then post the profiles of the borrowers on its website. An investor can invest in one or in as many businesses as desired. They can invest as individuals, a team/group, or a company/organisation. Once the African business has been selected, the investor enters into an auction process that defines the final interest rate applied to the loan. This is based on the Dutch auction principle - the more people involved in the bidding, the more favourable will be the terms for the borrower (i.e. lower average interest rate).

Front Page with Borrower Profiles

A businesses that is open for bidding is shown on the MYC4 website with a description of its activities, maximum interest rate that the potential borrower can pay and the amount of money required. In addition to the “social” profile, due diligence data is posted. This includes the investment, details on how the money will be used, current earnings, payroll costs, among others. The investor states the amount they wish to loan and the interest rate they are bidding (minimum bid is €5). The minimum interest rate that can be bid is 0% and the maximum 25%. Other ‘customers’ then make bids until the bidding is closed. If any investor is bidding too high they are withdrawn from the investment unless they lower the proposed interest rate. The closing time for the auction depends on the amount of money required, with the average bidding time lasting 14 days. The loans are generally for 12 months and the investors can track repayments on the MYC4 website and receive email notifications. The average interest rate for investors in October 2008 was 12.7%, before defaults and currency gain/loss. Investors transfer money to their MYC4 account either via Quickpay, that charges a small fee, or through a bank transfer, free of charge in Denmark. Once a bidding is closed, MYC4 sends this money to the relevant loan administrator who then physically distributes the money to the borrower. The loans are repaid monthly with an incentive for the borrower to reimburse the money as quickly as possible since the interest rate is applied on a declining basis. In addition, early or on-time repayment gives borrowers a good track record with MYC4 and therefore they are more likely to receive larger loans in the future. Once the loan has been totally repaid an investor can either re-loan the money or withdraw the funds. MYC4 charges fees for providing the infrastructure that handles the transactions. The revenue model is based on transaction fees alone. Investing via the platform is free of charge and the African business applying for a loan does not pay a fee either - “no cure – no pay” principle. MYC4 charges the business a flat fee of 2% of the amount of the loan, payable only when the loan is actually disbursed. When the loan is being repaid, the business pays an additional interest commission of 2% of the amount repaid on the basis of a declining balance.

Example of a Profile on MYC4: Sarah Nakitto - Health Clinic

About: Sarah, a doctor by profession established her clinic using an initial capital of 1,500 euros. With this, she rented a clinic, bought a few chairs, tables and medicine. Initially, she was able to treat diseases like malaria, typhoid and dress minor wounds. As her business developed, she began offering services such as HIV/AIDS counselling, antenatal and skin care. Today, she has three employees and she has the capacity to treat an average of 20 patients a day. Sarah generates a monthly net income of 67 euros. Objective: Sarah wants to invest more in her clinic but she lacks sufficient capital. She wants a loan to avail her with the means to set up an equipped laboratory. She will then be able to diagnose and treat her patients more effectively. She believes that she will be in a better position to offer her clients efficient, sufficient and standardized services. Sarah anticipates an increase in her monthly turnover by 23%, 9 months after receiving the loan.

People, Profit & Planet: Sarah strives to offer quality medical services to members of her community through her clinic. Through this practice, she plays an important role in combating diseases like malaria, typhoid and pneumonia. She uses the revenue she generates from her clinic to support her husband financially in providing food, shelter and education for their children.

Appendix 4 Ecosystem Management at Kiva and MYC4

Although the Kiva and MYC4 websites represent the more visible side of the P2P lending companies, much of the activity and potential impact of the model relies on the less visible work with the microfinance partners in the field. A critical factor for the positioning of each company is the value proposition for these field partners. This includes elements such as the specific segment of MFIs targeted, the cost of capital offered to the partners, the volume and velocity of funding, and the policies and management systems implemented. Both Kiva and MYC4 are investing increasing amounts of time and resources in improving the management of their ecosystem of partners. Their models, however, are evolving in different ways.

KIVA

Kiva works mostly with tier 2 and 3 MFIs worldwide that provide small loans to micro-entrepreneurs (average loan size is $400). It has about 100 MFI partners in 45 countries. These are organisations with a track record in micro-lending and a minimum of 1000 borrowers (often many more). They usually do not have the scale to finance themselves directly in international markets but need funds to grow their loan portfolio.

When Kiva began operations the due diligence process for vetting applicants was weak. “Kiva was knocking on MFIs’ doors and was probably taking on more risk than it should have,” Isabelle commented. When she was hired in 2007 to oversee the MFI partnerships, Isabelle spent most of her time developing procedures and systems to strengthen Kiva’s due diligence process. Eight people were hired to support this area within the organisation and are responsible for vetting each entrepreneur listed on the Kiva website. By 2008, Kiva had developed a system for screening and monitoring its Field Partners. These partners must meet Kiva’s “minimum requirements” before being made partners.

• Have a mission of lending to the poor for a social purpose with interest rates that are significantly discounted versus local alternatives.

• Be able to accept US dollar denominated debt capital from US lenders and manage a reasonable degree of currency risk.

• Be cleared of the US Department of Justice Terrorist Exclusion List and the Treasury Department’s list of “Specially Designated Nationals and Blocked Persons”.

• Provide Kiva with legal incorporation documents recognized by the local government.18

Once all these criteria are met, the partner is given a star rating by Kiva staff ranging from 1 to 5 stars. This rating estimates the repayment risk associated with each partner – a 5 star rating indicates that there is significant evidence “supporting a Field Partner’s repayment reliability”. Overall, in Kiva’s model, the MFI takes centre stage as a partner by posting a selection of its borrower portfolio on the website for funding and then servicing the loans and disbursing the funds. The MFI is often supported by Kiva Fellows, who are volunteers trained by Kiva to act as the “eyes and ears of Kiva in the field”, sending information on the borrowers’ stories and the impact of the loans, assisting the partnerships between Kiva and the MFI and promoting the Kiva model on the ground.

18 www.kiva.org: Risk and due diligence.

MYC4

MYC4 field operations are currently focused on Africa and target the segment of small business loans (average loan size is close to 2000 euros). The MYC4 platform is built around a network of local ‘providers’ and ‘lenders’. The providers are responsible for identifying viable businesses that need growth capital, performing the due diligence on the potential African borrower, advising the borrower and reporting on the impact of the loan. The lenders act as regulated banks or MFIs that issue the loan documents, disburse the cash, and receive the monthly reimbursements from the borrower. Sometimes the same field partner can assume both roles of provider and lender. The due diligence process has always been of utmost importance to MYC4. Checks on the borrowers are carried out by providers and include a background assessment of the business to ensure its reputation and check whether the company is involved in any activity that would be in conflict with the vision and mission of MYC4. These providers are also independent companies and sustainable businesses that survive from the fees received from the African entrepreneurs. It is therefore in their interest to select viable projects as the repayment performance is transparent on MYC4 and a bad track record could deter investors. The amount of time spent on this process depends on the size of the loan: Johnni Kjelsgaard, founder of Growth Africa Capital explains how they work with MYC4: “All loan applicants must go through an interview where their business is analysed and their capacity assessed. During the interviews the character of the borrower is gauged, among other methods, by having them provide two or three references to vouch for creditworthiness and intentions.”19

The process also includes two visits by the provider to the business premises. One is a scheduled visit to collect information and take photos that will then appear on the MYC4 platform. The second one is a “surprise visit”, to ensure that all the information gathered in the initial visit really reflects the business. By the end of 2008 MYC4 was about to embark on a new system to consolidate the auditing of all the African companies. This would be carried out in partnership with a Paris rating company that deals specifically with microfinance ratings. MYC4 manages the risk on behalf of the investors through a two stream license system, as Jes explained: “It is quite an elaborate system but useful. You enter one stream if you are newly created company and another if you are an established MFI; the system governs what prerequisite conditions make sense and at what rates our partners can grow in terms of their portfolios. The danger is that these firms can often look short term and don’t look at the ‘quality’ of the borrowers. As a result they might suffer because we at MYC4 are about transparency and investors will not consider providers who have high default rates.”

There are four phases that the partners pass through “to be groomed, from pilot, to new, to emerging and established.” At each stage the partner has to reach a number of criteria that are qualitative as well “as hard core figures.” This evaluation is carried out by MYC4 staff members who come from traditional business backgrounds instead of MFI or NGO contexts.

19 Changes - Q2 2008, MyC4 magazine

Appendix 5 Other Social Lending Ventures

MicroPlace is a wholly-owned subsidiary of eBay Inc. Founded in 2006 as an investment marketplace whose mission is: “To help alleviate global poverty by enabling everyday people to make investments in the world’s working poor. Our idea is simple. Microfinance institutions around the world have discovered an effective way to help the world’s working poor lift themselves out of poverty. These organisations need capital to expand and reach more of the working poor. At the same time, millions of everyday people here in the United States are looking for ways to make investments that yield a financial return while making a positive impact on the world. MicroPlace simply connects investors with microfinance institutions looking for funds.” MicroPlace differs from MYC4 and Kiva as it is the only broker-dealer specialising in microfinance securities and, as a result, is registered with the SEC. Investors buy securities from dedicated issuers. It is the funds that are generated by these sales that are then invested in microfinance institutions worldwide. The MFIs, in turn, deal with all the transactions with the borrowers. The issuers, however, are responsible for repayments of principal and interest to the investors. As a securitized fund guaranteed by the issuers, the risk is lower and the securities can be traded. MicroPlace is a less direct way of lending to the final borrower - it is ultimately a marketplace for microfinance securities.

DhanaX.com, was founded in June 2008. This Indian company is a lending platform that allows Indians to lend and borrow from each other. It deals exclusively in Indian Rupees so any investor outside of India is required to have a Rupee account. DhanaX works with a system of agents in India similar to MYC4’s providers and Kiva’s lenders. They are appointed by DhanaX to distribute the loan once DhanaX has received the money from the lender (this can be a bank transfer or even a cheque sent to the company). Investors can choose to make a loan to just one person after browsing profiles or “diversify their lending” – share out the money among many different borrowers to decrease the risk of non repayment. Dhanax is for- profit-company that has two streams of income. The borrowers pay a 6.5% commission fee for every loan they receive through DhanaX. The lenders also pay a commission of 1.5% on the monthly repayments they receive. They also pay a one time joining fee of Rs100. The loans, however, do earn interest from 11-12% pa.

Veecus.com, was launched in October 2008. It is a French limited company that claims it will make “money from volume-based fees paid by microfinance institutions once they have received funds for microentrepreneurs’ projects, as well as a €1 one-time sign-up fee from each lender.” They currently have two active MFIs: VSSU and Oasis Microfinance that list loans in India and Cameroon offering 3% interest rates to lenders.

Unitedprosperity.org is a Californian non-profit company that has developed a new twist to social lending - it is a person-to-person guarantee website. Instead of lending money directly and thus needing to transfer it internationally the “social guarantor” provides a cash collateral. This enables the small entrepreneur in the developing country to get a loan from a local bank, which s/he otherwise would be unable to obtain.

Source: various, company websites

Exhibit 1 The UN Millennium Development Goals

MYC4 Goal: To End Poverty Through Business

The goal of MYC4 is inspired by the United Nations eight Millennium Development Goals (MDGs). The goals should be met in 2015. Goal Target

Goal 1. Eradicate Extreme Poverty and Hunger Halve between 1990 and 2015, the proportion of people whose income is less that $1 a day.

Goal 2. Achieve Universal Primary Education Ensure that by 2015 children everywhere, boys and girls alike will be able to complete a full course of primary schooling.

Goal 3. Promote Gender Equality and Empower Eliminate gender disparity in primary Women and secondary education, preferably by 2005 and in levels of education no later than 2015.

Goal 4. Reduce Child Mortality Reduce by two-thirds, between 1990 and 2015, the under five mortality rate.

Goal 5. Improve Maternal Health Reduce by three quarters between 1990 and 2015 the maternal morality ratio.

Goal 6. Combat HIV/AIDS, Malaria and other Have halted by 2015 and begun to Diseases reverse the spread of HIV/AIDS.

Goal 7. Ensure Environmental Sustainability Integrate the principles of sustainable development into country policies and programmes and reverse the loss of environmental resources.

Goal 8. Develop a Global Partnership for Development aid falls for the second Development year, jeopardizing commitments for 2010

The goals form a blueprint agreed to by 192 countries and all the world’s leading development institutions. Source: The Millennium Development Goals Report 2008. United Nations, New York, 2008

Exhibit 2 Statistics of Kiva and MYC4

Kiva MYC4 Launched October 2005 Launched October 2007 Dec 2007 Oct 2008 Dec 2007 Oct 2008 Cumulative Loan Volume 12,250,512 37,747,507 300,000 5,190,195 in EUROS

Number of lenders 250,000* 353,543 2,500 6,885

Average amount loaned per 49* 107 120 562 Lender in EUROS Number of loans funded 19,250* 67,543 500 3079 Average interest rate for 0% 0% 10.9% 12.7% lenders

Average Interest Rate for 25% 24% 40% 40% borrowers (APR after fees and costs of intermediaries) % of loans that defaulted** Under 2% 1.8% Under 2% 1.5%

Number of microfinance 48* 88 2 providers 13 providers institution partners 1 loan admin. 7 loan admin Number of employees 20 FTE 30 FTE 9 22 in Denmark, 250 volunteers 400 volunteers 10 in Uganda

*As of October 2007 ** delinquency rates are higher (around 5%) for loans that have not yet ended and could still be recovered

Source: annual report MYC4, press releases and www.kiva.org

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