Now Kiva is Making Loans in the U.S.

The peer-to-peer lending market, often seen as a promising funding source, has a new entrant—albeit one that may be familiar to many. San Francisco-based Kiva Microlending, which facilitates loans to entrepreneurs in the developing world, is opening up shop in the U.S. That's riling some in Kiva's lender community, who worry that the U.S. effort will reduce the amount of funds available for other nations. Then there's the question of whether U.S. repayment rates will match the 98.5% Kiva has achieved overseas.

By partnering with San Francisco-based Opportunity Fund and New York-based Accion USA, Kiva is replicating the model it uses in other countries, using its lender base to provide funds to local partners who then vet and administer the loans. The lenders don't earn any interest, but the site's partners charge interest to cover their own operating costs. In the U.S., no loan will exceed $10,000, and the total value of U.S. loans outstanding will be capped for now at $800,000, about 3.6% of Kiva's current total.

But Kiva, unlike other peer-to-peer lending sites, is a nonprofit, with a mission to alleviate poverty. When Kiva asked its Web site visitors about the expansion, 47% of respondents approved, 45% were against it; the rest were undecided. "Not only are these people not in poverty," wrote Thomas James Slater, a lender living in Singapore, "they are living in a country that has the highest living standard in history." Kiva co-founder and CEO Matt Flannery counters that many U.S. entrepreneurs with low or moderate incomes can't get credit, and loans to them will create jobs and reduce poverty here. He also hopes a vibrant U.S. lending operation will lure more lenders who will also lend overseas.

Significantly, Kiva does not define "poverty" in its markets, leaving that job to its partners. Opportunity Fund makes loans to those with less than 80% of an area's median income, while Accion says most of its borrowers are low- to moderate-income immigrants or minorities. Gloria Burrell, owner of Parkside Postal in San Francisco, a shipping store with $90,000 in sales, recently got a $5,000 working capital loan from Opportunity Fund. Her income last year was $30,000.

Then there's the question of repayment. Prosper, the biggest peer-to-peer lender in the U.S., has a 20% chargeoff rate. Both Accion and Opportunity Fund cite chargeoff rates of about 10%. Flannery credits his 1.5% default rate to his partners' screening efforts and other countries' inefficient capital markets. He expects U.S. losses to be higher, as the lowest-risk entrepreneurs may find other financing. But Jim Bruene, editor of the newsletter Online Banking Report, says Kiva's lenders will accept a higher bad loan rate. "If you are lending at zero percent, you are making a donation," Bruene says. "So if you get $9 out of $10 back you'll be O.K. with it." Something that really can't be said of traditional loan officers.

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