Small Change, Big Payoff

Photo: Max Schoening

The idea that lending money to the poorest of the poor can produce economic and social change has steadily gained traction since 1976. That’s when economist and Chittagong University professor Muhammad Yunus started the Grameen Bank, giving credit to struggling cottage industries without collateral in Bangladesh. Other organizations around the globe have followed his lead, and when Yunus and his bank shared the Nobel Peace Prize last year, microfinance became an even hotter topic.

Somewhere in the center of the sun are Matt and Jessica Jackley Flannery, founders of Kiva, a web-based nonprofit that helps individuals make loans to small businesses in developing countries. What makes Kiva different from other microlenders? “If you have $10,000 to lend, you have many options,” says Matt, ’00, MA ’01. “If you have $25 to lend, this is the only option.”

People are lining up. In fact, Kiva has so many lenders—more than 123,000 extending $12.4 million to some 18,000 entrepreneurs in 39 countries—that it recently limited each participant to $25 per business, “so that everyone has a chance to make a Kiva loan.” After two years in operation, Kiva attracts $1.5 million a month, Matt says. The impact is bigger than it looks, notes Jessica, MBA ’07, because “each loan is touching 15 people, whether it’s other workers in the business, or family.”

The process is simple. Go to Kiva's website. Read the stories and see the photos of borrowers. Carlos Quimis of Ecuador makes furniture and needs to buy new equipment; Dusti Kurbonov, who sells children’s clothes in the markets of Tajikistan, wants to open another trading location. Like MySpace or Facebook, Kiva functions as a community, so you can browse through profiles of other lenders (complete with photos, hometowns, philosophies and portfolios) to see who’s involved with what. The site’s Journal section offers progress reports on the entrepreneurs (and their repayments) as well as recommendations. Then you can pick a business to help finance.

But don’t wait too long. One Wednesday night, Kiva’s featured entrepreneur was Vaiolupe Saolotoga, a 21-year-old mother in Samoa who is expanding her business in hand-printed fabrics; in the photo, she holds up a light brown, gauzy swatch printed with a large flower and leaves. She had only $300 of the $800 she needed. Within hours, the balance of the loan was secured.

Kiva collaborates with 67 microfinance institutions around the world that recommend the borrowers and administer the loans. Kiva screens each institution, posting a rating (one star to five)—based on its repayment history, audits and independent evaluations—to help lenders assess risk. Loan terms range from four months to 18 months, and most lenders reinvest when their loan is repaid (they do not earn interest; Kiva’s partner institutions do). Matt reports a repayment rate of 99.67 percent.

As CNN noted in a report last year, “If you’ve got 25 bucks, a PC and a PayPal account, you’ve now got the wherewithal to be an international financier.” When you press the “pay” button, the site rolls over to PayPal—just as eBay does—and you never have to open your checkbook or wallet.

Under such circumstances, it’s fun to lend money. Matt goes farther: he says this kind of philanthropy can become an addiction—although “most people feel like it’s not a donation; it’s a weird in-between.” Because they’ll see the money again, he says, “People feel good about that—it’s there if they need it.”

According to Yunus, nothing less than world peace is at stake: “94 percent of the world income goes to 40 percent of the population while 60 percent of people live on only 6 percent of world income,” he said in his Nobel address. “Half of the world population lives on two dollars a day. Over 1 billion people live on less than a dollar a day. This is no formula for peace.” ABC World News hailed Kiva in June, echoing Yunus’s remarks: “Peace through PayPal?”

Significantly, the 16 full-time employees at Kiva’s offices in San Francisco’s Mission district are mostly in their 20s and 30s. (The organization has some 250 active volunteers.) This generation’s idealism tends to be more global, more strategic, more entrepreneurial than previous generations, with a good deal of media/marketing savvy. Matt says his contemporaries are “not looking to make a lot of money, retire and give it away. We’re looking to live our whole life in an integrated way. It’s not a binary approach.”

Premal Shah, president of Kiva, is a case in point. His interest in microfinance dates from a seminar with political science professor David Abernethy. “I really got into it,” Shah, ’98, recalls. With an undergraduate research opportunities grant, Shah returned to Ahmedabad, India—the city of his childhood—to work at a microfinance institution. “It created a lifelong love for this form of poverty alleviation.”

After a stint at a management consulting firm, Shah moved to an Internet startup called PayPal. He left the successful empire six years later to join Kiva—but only after persuading PayPal to offer free transactions to the fledgling nonprofit, a godsend in the world of microfinance, where exchange rates and unstable economies make even small fees difficult for the recipient countries, and where the “cut” taken by the mediators can make a big difference in a small loan.

Shah says Kiva makes a good philanthropic fit for PayPal because “Kiva actually runs on PayPal.” PayPal’s fortunate decision makes Kiva one of the biggest players in microfinance.

“We have totally started in the backyard of Stanford and Silicon Valley. If we were in Minnesota, we wouldn’t be connecting with this rich ecosystem,” Shah observes.

The ecosystem offers a steady supply of Stanford brainpower: microfinance partnerships manager Ben Elberger, ’06, chief technology officer Sam Mankiewicz, ’00, and computer engineer Jon Kart, ’00. It also includes some of Silicon Valley’s premier companies—PayPal, Google (“which drives about 30 percent of our traffic for free,” Shah says) and Yahoo—as well as Microsoft, MySpace and YouTube, among others. “Every major Internet company is helping us co-create an Internet public good that will, hopefully, outlast all of us.”

Kiva has also received grants from foundations like Kellogg, Draper Richards and DOEN, but Matt says most of Kiva’s costs are covered by an optional fee (10 percent of the loan) that lenders are invited to give.

In a sense, kiva began with the Flannerys’ love-at-first-sight meeting. In 2000 both attended the interfaith National Prayer Breakfast in Washington, D.C. Jessica was a senior in philosophy and political science at Bucknell; Matt was about to get his Stanford bachelor’s in symbolic systems and then a master’s in analytic philosophy.

Jessica moved to California for a month in January 2001, to test the chemistry. She had, as she put it, “no car, no bike, no job. My debut at the Business School was as a temporary administrative assistant for someone who was ill.” Later, as a staff member in the public management program, she helped launch the Global Philanthropy Forum. In 2003, Muhammed Yunus showed up as an unscheduled speaker.

For Jessica, the talk was a match dropped on an oil field. Yunus told the group of a recent plan to help Bangladesh’s beggars with small loans. The women were given a special Grameen identity card—“so that people start looking at them in a different way,” he said—and were allowed to borrow merchandise from local stores, returning what they could not sell.

He acknowledged that such ideas seem untenable initially, but urged the audience to think positively and boldly. “At Grameen, we don’t have any legal instrument between the lender and the borrower, and it is a very scary thing when we are lending more than $4 billion,” he said. “Everybody asks, ‘What will happen if nobody pays back?’ I say, ‘But everybody pays back, so why should I worry about it?’”

Jessica thought that Yunus’s work “was the coolest thing in the world.” With no relevant experience, she began talking to “anybody who would give me the time of day, who’d talk to me about microfinance.” She found a mentor in Brian Lehnen, of the Village Enterprise Fund, which helps small businesses in East Africa.

Six months later, she was in Kenya, Uganda and Tanzania, interviewing villagers about the impact of the loans. (Typical questions: “Do you take sugar with your tea?” “Do you sleep on a mattress?”) “It was totally my dream job, and it never got old,” she says.

While Jessica was in Africa, Matt (the couple married in August 2003) was a programmer at TiVo, dreaming of launching a start-up. He conjured different businesses—a DVD vending machine one day, online clothing rental the next. His pipe dreams remained smoke.

So Matt took a brave step into his wife’s obsession, starting with a trip to Africa in March 2004. While the poverty and the problems were overwhelming, so were the business opportunities. “I liked the independent spirit of an informal economy,” he says. “It’s much more fun than formal economies. You could buy an entire business there for $500—that was exciting.” The Flannerys began to hatch their own microfinance scheme.

The challenges appeal to a young, idealistic and still-footloose generation. “We’re a real ragtag team,” Shah says. “We have all the complexity of being a Silicon Valley-based start-up that is growing really fast, coupled with the complexity of international financial transactions, all done with the limited resources of a nonprofit. It’s a complicated model, with a lot of due diligence and screening required.”

The Flannerys were warned that you can’t just send money around on the Internet, that whenever money is exchanged between two people, someone in some government somewhere will take notice. They were warned that the program couldn’t be replicated beyond a few African villages. “We were told it was way too daring, way too scary,” says Jessica.

“We had no idea what we were getting into,” says Matt. “Legally, it’s a minefield.” Issues included how a nonprofit could offer an investment product, whether Securities and Exchange Commission regulations about collateralization could be met, if the USA Patriot Act would be violated by lending money in unstable areas of the world. A host of laws protect the individual investor in the United States from scams, and the rules change from country to country. “Even today, regulators don’t know how to deal with it,” Matt says.

At the outset, lawyers shied away, Jessica recalls. “One day I called 47 lawyers. Finally, the 48th would talk to me.” Kiran Jain at Bingham McCutcheon helped set up Kiva as a nonprofit, and Jessica spent late hours in a law library doing research of her own. Since then, Kiva has had as many as six legal teams working pro bono.

Initial success came in October 2005. The Flannerys posted seven businesses in Uganda, including a fishmonger, a clothes reseller, a goat herder, a produce vendor. They sent an e-mail to their wedding invitation list and waited to see what would happen. All seven businesses were funded in a weekend. “We were blown away; everything worked. It was better than we expected,” Matt says. How to get the word out? With the help of a friend down the street, they cobbled together a press release. It met with silence, or seemed to.

Then one morning when Matt went to his cubicle at TiVo, he found he had received nearly a thousand e-mails to his Kiva address overnight. Thanks to a posting on the political blog, Daily Kos, they had raised $10,000 in one day. Suddenly, more than a million people had read about Kiva, and hundreds were actively discussing it online. Kiva—the Swahili word for “unity” or “concord”—was launched.

By this time, Jessica was enrolled in Stanford’s MBA program. “I begged Matt to quit his job,” she says. It wasn’t a hard sell.

Success met with success. In the first year, the site featured a spinach farmer in Cambodia, a hot-dog-stand man in Nicaragua, a carpenter in Gaza, a beekeeper in Ghana and a fish seller in Uganda. When PBS’s Frontline World aired a 15-minute spot on Kiva in October 2006, loan volume increased tenfold overnight, from $3,000 to $30,000 per day. Their Internet server crashed for four days.

Despite the millions of dollars passing hands and an avalanche of legal challenges, the rewards and the landmarks of success remain immediate and measurable, small and simple. “Instead of sleeping on a reed mat, someone could buy a blanket. Instead of mud walls, they have baked mud or concrete,” Jessica says. The Flannerys recall the story of a loan officer who was met with tears when he visited one borrower. He was expecting her to tell him she was defaulting on the loan. Instead, her tears were joyful: this was the first year she had been able to buy school textbooks for all her children, not just one.

These small signs of success are heartening in a world where problems seem so intractable. But Matt warns against over reliance on microfinance. “Microfinancing alone cannot solve poverty. It will not build a road, build a hospital, relieve a community suffering a tsunami, or cure malaria,” he says. “Sometimes people sell microlending as a cure to poverty—it does a disservice. It creates a false expectation. Providing credit to the poor cannot solve poverty by itself. It addresses one need, not every need.”

Shah agrees. “Like most things on Earth, the answers are more complicated and nuanced. It’s not the answer, it’s one part of the answer. Health care, education, curing malaria and TB ” are also part of the answer, he says. “If everyone plays a role, the chances to break the poverty trap go way up.”

Whatever its role fighting poverty, Kiva is transforming philanthropy. “We hope we’re giving the feeling of being part of a community,” Shah says. “There’s something beautiful about that. The website has all these people with regular day jobs coming together and supporting something. I don’t want to be utopic, but when people come together, even with small amounts like $25, it’s cheering to see how much money can be raised democratically.”

It’s also cheering to see that you don’t have to be a millionaire to make a difference. Kiva’s approach brings to mind a popular parable derived from a Loren Eiseley story. An older man saw a young boy walking along the ocean at low tide. The child was eagerly picking up beached starfishes and flinging them out to sea. “Son,” said the older man, “every day there are hundreds of starfishes stranded on the beach at low tide. You’re never going to make a difference.” The child lifted another starfish and threw it out to sea. “Made a difference to that one,” he replied.

Jessica and Matt Flannery, Premal Shah and their Kiva colleagues are out to change the world just that way. One by one.

CYNTHIA HAVEN is the humanities and arts reporter at Stanford News Service.