It's a Small World

Premal Shah fights global poverty one small loan at a time

Written by Laura Browne

Elizabeth Omalla, a Ugandan widow with seven children and three other dependents, needed capital for her fish business. She didn't have success with banks-she is asking for such a small amount of money that it is neither practical nor profitable for a bank to assist her. Luckily, a new resource on the Internet was able to provide the funds she needed.

Small by Western standards, the $500 loan given to Omalla was able to pay for transportation to Lake Victoria and six baskets of various fish. Omalla paid to have the fish smoked and returned to her hometown of Tororo to sell them. Her initial purchase of fish netted her an average of $40 per basket. Before long, Omalla was buying 15 baskets of fish per trip. Within nine months she repaid her loan, bought two cows and five goats, and even opened a savings account.

All this was made possible by Kiva.org, an organization named for a Swahili word meaning "agreement" or "unity." Kiva.org is the first person-to-person micro-lending web site, creating a transparent, connective and affordable option for anyone with Internet access to lend directly to the working poor. Somewhere in cyberspace, where microfinance meets Match.com, potential lenders browse online profiles featuring photos and stories of hopeful, Third World entrepreneurs. By funding their business, lenders empower these entrepreneurs to earn their way out of poverty. Lenders also have access to photos of fellow partners in the various projects, and receive updates of the entrepreneurs' progress. Remarkably, 100 percent of the loans to date have been returned in full.

Headquartered in San Francisco's Mission district, Kiva.org has been hailed as the leader in online microfinance in just its first year. The organization has attracted a significant base of lenders, borrowers and partners, built a staff and board of directors. In little more than a year, Kiva.org has raised $1.6 million in donations and serves 20,000 users-a number that has doubled every quarter.

One of the masterminds behind Kiva.org is 31-year-old Premal Shah, a former PayPal Senior Product manager. As President, he leads the organization with co-founder and CEO, Matt Flannery. Warm and sincere, Shah is passionate about the venture. And that passion has undoubtedly fueled the leap from a lucrative high-level position at a Silicon Valley darling to the insecurity and uncertainty of his role as global, philanthropic lender.

For Shah, however, it was nothing radical. He always knew he would act on his compassion for others and his desire to contribute to the human good. His parents took him to India when he was 5 years old, just before he entered kindergarten. "I have a vivid memory of being in a fruit market, and dropping a rupee on the ground [at the time valued at about 1/40 of a US penny]," he says. "It rolled into some sewage, and a frail, old woman slowly crouched down to pick it up. She seemed so grateful to have found it." It was his first experience with extreme poverty, and it would forever influence his future decisions.

Shah never forgot his trip to India and a desire to do good in the world remained firmly embedded in his consciousness. But as a child and a young man, he was unsure of what path he would ultimately take to achieve his goals. As early as the 3rd grade, Shah considered working for the U.N. It was not until his second year at Stanford that Shah first learned of the principles that would shape his contribution to the world.

"I was lucky," says Shah. "I was uninspired in college, and then in my sophomore year I was introduced to the world of micro-finance and the impact of small loans to the working poor." Compelled to learn more, Shah made microfinance the focus of his study. Stanford University awarded him a grant to research one of India's largest microfinance institutions, the Self Employed Women's Association. After earning his B.A. in Economics, Shah began his career as a Strategist for Mercer Management Consulting in New York. Eventually he moved to the Silicon Valley to work for PayPal where he spent six years helping to build the world's largest Internet payment network.

Working on innovative products for PayPal, and accumulating important skills and contacts, his philanthropic desires continued to incubate in the back of his mind. "I felt disconnected with the human condition," says Shah. He took a three month sabbatical and returned to India in 2005, where he worked full time at an Indian Non Government Organization (NGO).

While in India Shah had new opportunities to observe profound poverty. He grew more confident that the principals of microfinance could alleviate at least some problems he witnessed, but there were substantial obstacles. Shah was struck by the fact that there was both a shortage of capital and no real opportunity for average Americans, whom he believed could and would help, to participate in micro-financing solutions.

Inspired by Mohammad Yunus and Grameen Bank, a microfinance pioneer, Shah saw opportunity in the Internet to increase participation and directly connect individual donors to entrepreneurs in industrializing regions of the world. As an experiment, Shah posted a loan solicitation on eBay for a low-income woman doing small crafts in India. The post lasted less than 24 hours; eBay had a strict policy against soliciting investments.

Undeterred, Shah saw great potential in using eBay philanthropically. He was able to leverage contacts at PayPal, an eBay company, to garner support and resources for further investigation.

eBay sponsored a year of research. Shah studied technology's potential to impact economic empowerment. He was especially inspired by companies that relied upon building trust and connecting people over the Internet-social experiments like Wikipedia, MySpace and eBay, and open source projects like Mozilla.

One fateful day Shah was put in touch with Matt Flannery. Flannery had recently started an organization called Kiva with seven East African businesses after traveling to Uganda. Shah and Flannery met, and discovered their plans to be nearly identical. A partnership was born-but this wasn't the only partnership Shah needed.

Shah's employer, PayPal, agreed to waive their standard charge of three percent to the recipient of payments, providing free payment processing on a continuing basis. With PayPals participation, 100 percent of loan funds could now reach the micro-entrepreneur and 100 percent could be repaid to the Internet lender. PayPal's contribution has proven to be more than simply philanthropic. Their association with Kiva.org has produced a huge public relations windfall for the company. After nine months of research, Shah and Flannery officially launched Kiva.org in October 2005 with 25 profiles seeking funding.

The Kiva team spent much of its first year finding and evaluating local microfinance partners worldwide. In turn, these partners screen each micro-entrepreneur to determine their credit-worthiness. Profiles of qualified applicants are then posted on Kiva.org. As the Internet community in America and elsewhere chooses to assist the micro-entrepreneurs- essentially lending money-Kiva.org aggregates funds and transfers them to a local microfinance partner with access to the entrepreneurs. The local partner distributes funds and collects payments. Kiva.org has grown its network to 27 partners in Africa, Asia, Eastern Europe, the Middle East and Latin America.

Because maintaining trust and goodwill are so essential to the success of Kiva.org, borrowers actually monitor each other and the loan repayments. If an entrepreneur defaults on a loan, borrowers understand they will all be penalized as funds become less available in the future. This peer monitoring helps to maintain the phenomenal 100 percent repayment rate. As Kiva.org grows over time, repayment rates are projected to exceed 96 percent.

Like most Internet success stories, the public quickly caught on to Kiva.org, and spread the word throughout the blogosphere including Daily Kos and Huffington Post), on academic campuses and on MySpace. Representatives from Kiva.org have received invitations to speak at the Clinton Global Initiative in New York and Global Microcredit Summit in Canada. Kiva.org has become the most trafficked microfinance site on the web, providing capital for over 750 micro-enterprises in 12 developing countries.

Eventually, both Shah and Flannery eventually left their full time jobs to devote their energies to Kiva.org.

While the site was enjoying overwhelming success, there were inevitable challenges that went along with explosive growth. "One of our challenges was that we were thinking too small," says Shah, "We've definitely grown faster than expected." After a 15 minute segment on the PBS program Frontline/World, the website received so many visitors that the system crashed. Visitors were asked to e-mail a separate account while Kiva.org worked to get up and running; they received over five thousand emails, and they still haven't been able to answer them all.

One of Kiva'org's greatest challenges comes from its unique business model. While some companies serve only one set of clients or customers, Kiva must ensure that both supply and demand are in balance. In the beginning, largely due to favorable press from BBC, CNN and Wall Street Journal, Kiva.org had too many lenders, and not enough Third World businesses to sponsor. The site was flush with supply but lacked demand.

This problem has been solved by inviting more nonprofit organizations internationally to post local businesses. Maintaining the delicate balance of supply and demand requires continuing effort. Securing lenders necessary to absorb new waves of ‘inventory' has required renewed focus on promotion in the U.S.

Another important issue Kiva.org faced was deciding whether to register with the government as a 501(c)3 nonprofit organization. In light of its high profile, venture capital would certainly be raised much more quickly-and in much greater sums-than the donations Kiva.org was relying on.The potential cash flow and the ability to serve more people faster was tempting, but venture capital would jeopardize Kiva's nonprofit status. In the end, Shah and Flannery felt it was consistent with their spirit of philanthropy to exist as a nonprofit organization.

Shah's vision is to allow Kiva.org to connect people on a massive scale and ultimately reduce poverty in developing countries by giving entrepreneurs the ability to build their businesses through flexible loans.

What do lenders get out of this? With an interest rate of 0 percent, Kiva.org offers intangibles. Lenders enjoy the satisfaction of helping an enterprising individual out of poverty and experience a unique bond with someone on the other side of the globe. And while Kiva.org strives to make it affordable for funders to experience philanthropic good will, it is also their plan is to become self-sustainable as an organization. Kiva.org must currently raise funds to keep the operation running, since 100 percent of lenders donations go directly to entrepreneurs. Kiva has eight full time volunteer staff members and at least a dozen part time volunteers. Although they don't have the money to hire employees, Shah and Flannery hope to scale their volume and revenue stream to cover a fulltime paid staff of 10 in three to five years. So far, it has taken Kiva.org $250,000 in contributions to raise $1.6 million to lend their entrepreneurs. Kiva hopes to be self-sufficient within the next year, either through small optional charges to lenders or small capital fees charged to the borrowers.

Shah is convinced that people want to change the world-they just want to know that it is done effectively. "After hearing stories that half the money given to the Tsunami relief efforts is sitting in bank accounts," says Shah, "people want to know that their money is not going to office expenses, but instead directly to a person who needs it." With Kiva.org there is full accountability.

Given the positive response he has received so far, and the promise of a bright future for Kiva.org, Shah has received at least 100 percent emotional return on his great risk. "The Internet is making altruism transparent," says Shah. "It's a beautiful thing that is happening."