Monday, August 13, 2012

Q&A: Expiring loans, Credit Limits, and the evolution of Kiva

Kiva envisions a world where all people, even in the most remote areas, have the power to create opportunity for themselves and others. To realize this vision and reach more people, we must continue to evolve our model.

Recently, we decided to take the next step by loosening up control of our global marketplace. We’re doing this in several ways:

- Easing up rules restricting the types, sizes and timelines of loans our Field Partners can post to the website.

- Bringing on new types of partners that don’t fit the traditional microfinance institution mold, like Strathmore University in Kenya, and Barefoot Power in Tanzania. Some of these partners are companies, and others are schools, nonprofits and NGOs. They share a mission to reach underserved populations with loan products tailored to borrower needs.

- Encouraging our current partners to evolve their portfolios so that they post more loans that appeal to lenders, and more loans that are designed to make real, tangible differences in people’s lives.

The overarching goals with this shift are to ensure that Kiva lenders’ funds are making the biggest impact possible for borrowers, while also reaching more people with the financial products they want and need.

All of this is adding up to a lot of change within Kiva, and with change comes significant learnings but also some discomfort. We know that one of the most uncomfortable byproducts of change right now is the unprecedented increase in expiring loans. It is not comfortable for us either, and we have spent considerable time listening to our lenders and Field Partners, analyzing the drivers and challenging ourselves on whether expirations are really a necessary part of ensuring greater impact for more borrowers.

The Q&A below attempts to address the questions we’ve been hearing from you, and questions we’ve been pondering internally as a staff. We don’t have all the answers yet -- or even all the questions -- but we’re working to figure it out with your help and feedback.

Our goal is for this post to be a living document that we’ll update continually as we learn more, hear more questions, and address more concerns and ideas from all of you. Thank you for helping us evolve and grow Kiva so you and other lenders can help more people realize their dreams around the world.

1. What are expirations?

On Kiva, if a loan doesn’t fully fund within 30 days of being listed on the website, it “expires.” This means three things:

- The loan profile remains on the site but shows up as “expired.”
- All lenders who have chipped in to fund the loan already are refunded.
- The Field Partner administering the loan doesn’t receive any of the funds.

2. Why does Kiva have a 30-day expiration policy? Why not let all loans stay on the website until they are 100% funded?

Kiva established its 30-day expiration policy for two reasons:

- To ensure the loans posted to the website reflect the on-the-ground reality. 

Most of Kiva’s Field Partners disburse loan funds to borrowers before loans are funded on the website. This allows borrowers to access funds quickly and when they need them without having to wait for loans to fund online. Kiva lenders’ funds then backfill these pre-disbursed loans. That said, lenders only get repaid if the borrowers they’ve selected repay, that’s the important connection point between our lenders and borrowers.

The 30-day fundraising limit ensures that a loan doesn’t remain posted long after a borrower has received their loan and started to repay. If there were no time limit, you could be lending $25 to someone who has already repaid their loan.

- To provide a feedback loop that enables Field Partners to improve loan requests and post more loans aligned with Kiva lenders’ interests and passions.

We hear a lot from lenders, but we’re also constantly listening to our Field Partners. Many of them told us they wanted greater flexibility -- like the ability to post larger loans or loans with longer repayment schedules. Responding to their needs, we gave the green light to post loans with fewer restrictions.

On the other side of the coin, we want to make sure that lenders can easily find loans that speak to them. Accordingly, we want to make sure our partners get the feedback they need to post loans that connect with lenders. The 30-day expiration policy is a step toward creating a feedback loop between our lenders and partners. We know this system isn’t perfect, but we’re working hard to make improvements (see #9 for details) so that Field Partners can respond faster and more effectively to expirations. We have discussed partially funding loans, but run the risk of creating confusion for our Field Partners, and adding complexity to the lender experience.

3. What has been the historical rate of expiration since Kiva’s launch in 2005?

Prior to 2012, fewer than 100 loans expired every year.

4. What is the current rate of expirations?

Through the end of July 2012, just over 4,000 loans have expired, totaling $5.9 million.

5. Why are expirations so high right now? 

Expirations occur when there are more loans on the website than there are lenders to fund them. This isn’t unusual. It is difficult to artificially control the availability of loans to match lenders’ preferences and patterns, and Kiva does not believe this would produce the best outcome for lenders, borrowers or Field Partners.

Looking at the demand side of the equation, Kiva has seen its number of lenders and the amount they lend grow steadily year over year. In recent months, we’ve actually seen some of the highest levels of demand in Kiva’s history.

That leaves the supply side. The record levels of expirations can be attributed to the high volume of loans being posted to Kiva. This increase is primarily the result of our Field Partners’ unexpectedly enthusiastic response to Kiva’s Credit Limits program.

6. What is Kiva’s Credit Limits program? 

The Credit Limits program launched in 2011 with the following goals:

- Give partners flexibility: In 2008, Kiva implemented monthly fundraising limits. At that time, Kiva was beginning to work with more Field Partners, and we were testing new ways to better manage and support these relationships. Monthly fundraising limits seemed like a natural way to work with our partners. Unfortunately, as we later learned, this kept some of our partners from serving borrowers to the best of their abilities -- especially partners serving clients impacted by seasonality, like agricultural workers. Establishing credit limits that aren’t enforced on a monthly basis gives partners across the board more flexibility to meet the financial needs of their clients.

- Increase the number and diversity of loans on Kiva: Kiva’s mission is to connect people around the world through microlending to alleviate poverty. To achieve this goal, we’re very sensitive to the needs of borrowers, Field Partners and lenders. In order to keep lenders engaged with expanding choices and serve a greater range of borrowers, we seek to build a marketplace where there are a lot of different loans to choose from. This way, every time you come back to Kiva there will be something different -- from loans for women to start grocery stores to loans for communities to sink wells, farmers to convert to organic fertilizers, parents to buy solar study lanterns for their kids, and more.

With Credit Limits, Field Partners have the opportunity to offer more loans, which leads to greater variety of borrowers and loan types. This also gives Field Partners the flexibility to test different types of loans to see what is most interesting to Kiva’s global lending community. Right now, there are 22 Kiva Field Partners in the Credit Limits program, representing about 15% of our partnerships.

Looking at an example, let’s say Field Partner X is not on Credit Limits, and has a monthly posting limit of $10,000. This Field Partner works primarily with rural farmers whose loan needs are tied to agricultural growing seasons. But in the spring, when all local farmers need to purchase inputs like fertilizer and seed, the $10,000 limit forces Field Partner X to turn away several farmers who will have a tough time finding funds elsewhere. And, in the summer, no farmers may need capital so the Field Partner won’t post loans at all.

Why not let Field Partner X post loans that best meet its clients’ needs? If they were in the Credit Limits program, they would have the flexibility to post loans up to their total credit limit at any time during the year. They could then manage the availability of loans in a way that takes their clients’ needs and lifestyles into account.

7. When Kiva launched Credit Limits, did you know that expirations would increase?

We knew that the Credit Limits program would result in more loans available on Kiva, which we determined to be a positive shift for lenders, borrowers and Field Partners (see #6). That said, we didn’t anticipate how enthusiastic our partners would be about the increased level of flexibility. Many have posted more loans, and over successive months, than we expected.

8. What is Kiva doing to control the rate of expirations?

We are closely monitoring the expiration rate and its impact on the Kiva ecosystem. We are taking several steps to address the continued rise in expiring loans:

- Delay adding more partners to the Credit Limits program. We will maintain a steady state of partners on Credit Limits until we have better feedback mechanisms in place to help our partners understand and respond to lenders’ feedback on the types and volume of loans they are posting.

In particular, we are developing a “marketplace insights quick hits” tool to give partners greater insight into all the types and amounts of loans fundraising across Kiva at any given time. This will help partners decide what types of loans to post and when. We plan to launch this tool by the end of the year, and will resume adding partners to the Credit Limits program, with a close eye on expirations.

- Acknowledge that Kiva is not the right marketplace for every microfinance institution (MFI). Many MFIs around the world receive significant funding from many sources and investors. This gives them no incentive to ensure that Kiva lenders’ funds have the greatest impact on the communities they serve. To change this picture, Kiva is working with these Field Partners to explore other populations, places and products they could add to their portfolios to make the most social impact with lender funds.

Along these lines, we’re developing a “themed” Credit Limits tool. This would require partners on Credit Limits to post only the loans that are shown to have the greatest impact for borrowers, and/or meet the passions and interests of our lenders. These include loans for clean energy, drinking water, sanitation, education, vulnerable populations, remote communities and more. In some cases, this requirement may not match a Field Partner’s business model, at which point Kiva and the partner will agree to end the relationship.

9. How are these changes affecting borrowers? What is Kiva doing to minimize the negative impact?

Because the majority of our Field Partners pre-disburse funds to their borrowers, the immediate impact on loan recipients is minimal. In the short-term, borrowers are still getting the funds they need. 

The bigger impact is on the Field Partner because it pre-disbursed a loan with non-Kiva funds, assuming that Kiva lenders would cover the amount requested. But, if the borrower repays on time, the impact on the Field Partner is also minimal.

However, if the borrower doesn’t pay back their loan, and the loan has expired on Kiva, the Field Partner has to find the money to cover the loss. Over time, this could impact borrowers if the Field Partner has to continually cover losses out of pocket. The partner may not be able to reach as many borrowers, or provide the additional support services that help borrowers lift themselves out of poverty.

10. What is the impact on the borrower if the loan is post-disbursed? What is Kiva doing to manage potential negative impact? 

Right now, less than 5% of Kiva’s Field Partners disburse loans after they are fully raised on Kiva. While we are planning to bring on more partners that post-disburse -- like education loan partner Strathmore University in Kenya -- they will remain a small part of our overall portfolio for the near term. Expirations do have a direct negative impact on these borrowers. If a post-disbursed loan does not fully fund in time on Kiva, the borrower does not receive any funds.

11. What is the impact of these changes on Field Partners? 

In June 2012, 88 of Kiva’s 154 Field Partners had at least one loan expire. This is the greatest number of partners to have experienced expirations in Kiva’s history. Usually, expirations are limited to partners that post loans that are less attractive to lenders -- male taxi drivers in the Middle East who have their faces blurred is a key example. Basically, most expirations occur when lenders don’t feel a connection with a borrower through their photo or story, or if they are skeptical about the difference the loan will make in the borrower’s life.

Currently, expirations are affecting Kiva’s entire portfolio, including loans that have traditionally funded quickly -- like agricultural loans for women in Africa. And it’s clear that the significant increase in loan volume is impacting all loans, not just loans posted by partners in the Credit Limits program.

As we explained in #9, Field Partners bear the brunt of expirations. If a loan is pre-disbursed, the Field Partner has to fund it out of its own reserves. The impact is minimal if the borrower pays the loan back in full. But, if the borrower doesn’t pay back the loan and the loan has expired on Kiva, the Field Partner must cover the loss out of its own pocket. This may be a rare occurrence, but it can have a negative impact on a partner depending on its size and financial stability.

12. What kind of feedback is Kiva getting from our Field Partners about the increase in expirations?

Our Field Partners are surprised and frustrated with expirations as well. Naturally, they want to see all their loans get funded, even though they know that expiration is a possibility. To help with the transition, Kiva’s Portfolio and Partner Operations teams are working closely with the Field Partners experiencing the most expirations. The goal is to figure out how to make their loans more appealing to lenders -- whether that means posting more of a certain type of loan or improving borrower photos, videos and stories. We’re also helping Field Partners understand lending seasonality and what motivates lenders to fund loans.

Already, we’re starting to see a shift in loans posted to Kiva, indicating that our partners are in fact understanding that over-posting will lead to more expirations. And some partners are even posting better borrower photos and stories to connect with lender interests.

13. Kiva believes that to deliver on our mission we need to test new ideas without fear of failure, analyze learnings and apply what works. Based on this, what did Kiva learn in launching Credit Limits that will be applied going forward? 

Following are key learnings that we are taking into consideration as we bring additional partners into the Credit Limits program:

- Ensure feedback tools work for our Field Partners to easily and efficiently adjust their loan postings to meet lender demand. We are already working on new tools as discussed in FAQ #8.

- Ensure Credit Limits can be applied in a way that drives high impact for borrowers, and reflects lender interest. Also discussed in #8, themed Credit Limits will give Field Partners the ability to post as many loans as they want up to their Credit Limit, and within a certain category of loans that is shown to have the greatest borrower impact and/or connect with the interest and passions of our lenders (i.e. clean energy loans, education loans, etc.). Once we have this tool in place, our Field Partners will be able to do the most good with Kiva lenders’ funds.

14. Is Kiva seeing an impact on lenders and demand? What is Kiva doing to manage these changes? 

Kiva has actually experienced near-record highs for lending recently. May and June 2012 are the third and second highest loan volume months in Kiva history.

That said, we are very sensitive to the number and intensity of the negative comments we’ve received from some of our lenders, as well as the confusion and frustration expressed throughout the Kiva community. We’ve seen a spike in negative conversation on Kiva lending team discussion boards, for instance. And now we’re seeing it carry over to our social media channels, impacting newer and prospective lenders.

We support our lenders’ ability to voice their opinions, frustrations and ideas as an essential part of our ecosystem. We love that so many people are passionate about more deeply impacting the lives of the working poor. We hope this blog post will provide yet another forum where we can continue to address new questions and concerns, and update our community on Kiva’s vision and plans to deliver on that vision.

Have questions? Concerns? We want to hear from you at