Kiva itself is a front, a sort of backing bank for agencies that offer microloans. A microloan is a loan in an amount that normal banks don't traffic in. A loan with a term so short normal banks don't deem it worth their time. A micro-loan can also be the key to change. Micro-lenders deal with a populace who are often extremely poor by first world standards. The mechanics of profit are no different for these people than for any other with one critical exception - they have much less of it. Taking out a $20,000 loan would be unthinkable for many Kiva clients - they might not make that much in two decades. The truth is that to improve their lives they often need far less. They compensate by having more reasonable goals.
My brother once took out a loan for $250,000 to start a business. His goal was clear - to get the business running, pay off his debt, and then live on the income generated by it. The borrowers on the other end of the Kiva connection have similar goals but on a smaller scale. A common goal is, for instance, to eat better. One business I loaned to noted that they could now afford meat once a week. Other times the goal of a loan will be to fund education for the year. The family can probably afford tiny monthly payments but the up front school costs are prohibitive, and in many countries school does not start for you until your parents pay up in full. Mamadou wanted a loan to buy goats. He would buy the young goats, raise them on the land, and sell them for meat when they were older. When I choose my loans I'm looking for someone who wants to do what they know. If you want to lend $1000 to the bushman to learn to play concert violin, be my guest. I believe a goat herder knows how to raise goats and thus has a reasonable chance of success.
The businesses you see on Kiva might look markedly different than one would expect. For instance, a $200 loan request to buy a cow. Once mated that cow will give milk every day. A common business is to sell the milk by the glass. The same cow can be bred, continuing the chain of wealth. Manure from the cow will be used as fertilizer for a family plot. Another common business might be to purchase cell phones and calling cards. The cell time is then sold by the minute to people who do not have a phone. Such "phone rooms" are common in some countries. Food preparation is another common business. Buy the ingredients, make the food, sell it at a road side stand. You have nothing to sell if you have no ingredients, you have no money with nothing to sell. A bank won't glance at one of these people, so poor the only collateral they hold is their own good word. A micro-loan agency caters to this market.
A common objection to microloans is that they take business away from a country's banking system. Many of the people receiving microloans are actually in a financial state that leaves them below the realm of normal banks. Micro-lenders aren't cannibalizing the banking market in these countries, they are catering to a different group of people. The only security for many of these loans is a person's good word, and that is a powerful motivator in many cultures. You'll also see women's solidarity groups, where a group of women pool their money to finance one member each month. The other women in the group will pick up the debt if one cannot pay. It is honor and sisterhood that secure those loans.
Twenty five dollars. Half of what any next-gen game costs. Less than many of us spend on a meal. Through the power of currency exchange that $25 goes a long way. Some projects require more than $25, and for that lenders band together. I give $25, you and a dozen friends do as well. Together we finance a butcher shop in Mexico.
So you lend $25 and it goes to a person in need of a loan. They invest the money. They work through and pay the loan. The loan officers send infrequent reports on how the business is doing, sometimes even with pictures. As the borrower pays back, the money accrues until finally the loan is paid off and the money is transferred back to you. At that point you can choose to re-invest or withdraw your funds. And what if disease strikes a family, or the livestock die, or the crop fails? You are out $25. There'll be no driving to Africa to reclaim it, no fire sale of collateral to recover pennies.
Your loan is not a donation: you expect that the money will be repaid. You'll rest easier if you pretend it's gone. I lent money to one project that experienced some serious problems. It helps to remember that often you are loaning money to places with corruption problems that make the International Olympic Committee look like bastions of virtue. And while it's a loan, you aren't recovering interest. The micro-lending agency is. This is a common point of concern - if I'm providing the capital interest free, shouldn't the loan agency? No. The loan officer needs to eat. The loan agency needs to make a profit to set aside and build its own lending reserve. The partners will charge interest (interest that seems high by normal loan standards). Doing so creates a sustainable business where every successful loan builds into the cycle, allowing others to be helped. Kiva claims they monitor the interest charged by their partners and only allow "reasonable" rates but with a term of six months and loan amounts like $125, interest will always be high. Your "interest" is connection to other human beings.
Mamadou paid off his loan this month in full, one month early. I plugged the money back into new loans. I won't be gaining money on these loans. Just a sense of connection. Just a hope that somewhere in the world I can make a difference. If somewhere tonight a child eats better; if this year they sit down to school, if this time they can afford the medicine, that is enough. I accept these things as proof of the power of small.