At Kiva U.S., we’re committed to rethinking creditworthiness and expanding financial access to help underserved communities thrive. Since the inception of Kiva U.S.’s program in 2011, we’ve facilitated the crowdfunding of US $65 million in microloans from more than 372,000 lenders, to more than 9,000 borrowers nationwide. Although we’re proud of this impact, we firmly believe that we can reach even more individuals – small business owners and entrepreneurs near and far who could benefit greatly from our 0%-interest, zero-fee, zero-collateral loan product.
When the opportunity arose for Kiva U.S. to collaborate with Learning Collider, a social science research lab that leverages technology platforms to innovate, test, and scale solutions reducing inequality; we didn’t think twice. The strong mission alignment was evident from the start, and we knew Learning Collider would be an invaluable partner in our work to create systemic change that make financial security and financial mobility in the U.S. more equitable.
We worked with Learning Collider to conduct a randomized study of our social underwriting process, and the preliminary results both corroborate and challenge what we as a program believe to be true.
A data-driven partner committed to reducing inequality
The main question which we jointly decided to investigate was the following:
Can we expand access to credit for traditionally excluded groups without lowering repayment rates?
Through this collaboration, we aimed to make our Kiva U.S. social underwriting even more inclusive while maintaining loan repayment rates. We aimed to ensure that qualified applicants from underrepresented groups were not overlooked in the application review process, and that we were extending loans to those who are most financially excluded.
As part of this study, we used an algorithm to relate Kiva U.S. application data on loan amount and loan approval to the outcomes of the loan. Learning Collider designed the scientific study with methodology akin to a randomized controlled trial (RCT), and a small number of Kiva U.S. applicants were included. You can read more about the research design and methods here.
Social underwriting as a means to rethink creditworthiness
Jimbi took a loan through Kiva U.S. to grow her beauty salon business.
At Kiva U.S., we always emphasize the power of our ‘social underwriting’, a unique model which allows borrowers to utilize a Private Fundraising Period (PFP) or an endorsement from a Kiva Trustee to ‘underwrite’ their loan rather than relying on collateral, as traditional finance organizations would. (In this post, we will be focusing on the PFP component of social underwriting. Learn more about the entire Kiva U.S. loan lifecycle and/or about our national Hub and Trustee partnerships here.)
Private Fundraising is a 15-day period in which borrowers are tasked with finding between 5-50 individuals (the amount varies depending on numerous factors, primarily loan size) to contribute to their loan campaign prior to it going “live” on Kiva.org for another 30-45 days for Public Fundraising.
"I was glued to my app, watching generous people lend to me. I can’t wait to finish paying them back and show them that I am so grateful for them trusting me." - Kiva U.S. borrower, Jimbi, on the Kiva crowdfunding process
The PFP process provides borrowers the opportunity to demonstrate both their entrepreneurial spirit as well as ability to market their business – they are letting Kiva know that they have a “trust network” willing to lend them money (albeit in small increments). Friends and family members, colleagues, neighbors, clients and more offer their trust (and their dollars) to the borrower during this period, and, in turn, we believe the borrower will be more committed to repaying that loan.
This community-backed credibility is both powerful and encouraging, as is the momentum which borrowers experience each time they receive a notification that another individual, whether near or far, whether a loved one or a perfect stranger, has contributed to their Kiva campaign and brought them one step closer to their funding goal and, ultimately, their business goal.
“I am extremely grateful to Kiva for this opportunity to grow my business without the worry of paying this extremely expensive interest. The process was exciting, too. I was glued to my app, watching generous people lend to me. I can’t wait to finish paying them back and show them that I am so grateful for them trusting me. Words can’t express how grateful and uplifting this makes me feel.”
- Kiva U.S. borrower, Jimbi, on the Kiva crowdfunding process
Kiva U.S.'s crowdfunding process represents character-based lending, a type of lending which promotes a new, community-informed understanding of who is considered investable by empowering lenders to participate in evaluation and decision-making. In traditional financial institutions,perceptions on who is considered “investable” are inevitably influenced by widespread bias and the status quo – conventional lenders making lending decisions based on purely financial data (credit scores, cashflows, collateral, etc.).
And that is precisely why we’re committed to rethinking creditworthiness.
We strive to make lending decisions based on the strength of a borrower’s character and standing in their community, which we gauge via our social underwriting. We strive to equip every small business owner who has the conviction to repay with 0% interest, zero-fee capital. A lack of collateral, poor past credit history, or insufficient cash flow might prevent someone from accessing this type of capital elsewhere, but at Kiva, we pride ourselves in being able to fill the gap in the financial market and give entrepreneurs fair and equitable access to the financial resources they deserve and need to thrive.
Preliminary findings underline the value of social underwriting
Coming to clear-cut conclusions around our original research question is, at this point, more complicated than it may appear. As is common in randomized controlled trials, results are complex; still, initial insights revealed by Learning Collider help validate Kiva U.S.’s current model and inform future related research. This study was just the first (and likely not the last) conducted to scientifically measure the effects – and inclusivity – of our social underwriting model.
Learning Collider conducted preliminary independent variable analyses and regression analyses to measure the associations and effects of key variables in the model, including PFP requirements. For more details about the initial analyses, see this post by Learning Collider.
PFP lender requirements and loan repayment
The original research question, Can we expand access to credit for traditionally excluded groups without lowering repayment rates?, challenged us to consider, among other things, how Kiva’s current PFP requirements might be inherently – and inadvertently – restricting access to credit for traditionally excluded groups. Feedback we’ve collected from individuals who have had their Kiva PFP campaign expire (i.e., they did not reach their Private Lender goal) has elucidated several notable obstacles, such as:
Skepticism from their network about Kiva
Lack of extensive enough network
Lack of a tech-savvy network
Lack of broadband or lack of reliant broadband needed for making loan contributions (an obstacle especially prevalent in rural areas)
Lack of understanding of what Private Fundraising consists of
Fear of losing business clients by requesting their monetary contribution
Taking these obstacles into consideration and with the hopes that facilitating PFP could expand access to credit, the Learning Collider team established the following treatment groups:
Individuals who had the PFP requirement completely waived, meaning they did not need to gather the support of friends, family, and more in the typical 15-day Kiva Private Fundraising Period; instead, they went straight to Kiva’s global platform, Kiva.org, for 35 days of Public Fundraising.
Individuals who had their PFP requirements lowered; for example, an individual who qualified for a $10,000 Kiva loan and, per various criteria in their application, had a Private Lender goal of 15 per Kiva’s standard internal tiers, might have that goal lowered to 2 lenders.
Excluding both the small number of borrowers who were randomly selected to skip Private Fundraising as well as the handful of borrowers who had a Private Lender goal greater than 15, analysis across treatment and control groups demonstrated a positive, causal relationship between PFP requirements and repayment rates. In other words, as the number of peer lenders increased, so, too, did repayment rates – by a significant 1.7 percentage points for each PFP lender raised).
Insights acquired from the treatment group with reduced PFP requirements provided additional evidence for this relationship: PFP lender goals that were closer to our standard Kiva U.S. internal PFP tiers resulted in higher repayment rates – an increase of approximately 0.8 percentage points per lender during Private Fundraising.
Repayment implications, optimizing PFP requirements, and next steps
Across the treatment groups, repayment rates decreased. The repayment rate for the first loan payment (which is due exactly one month following loan disbursal) was 8 percentage points lower than the control group, and the overall repayment rate was 13 percentage points lower than the control group.
The tension between the risk (i.e., repayment rate) and social impact of these loans is evident in the results, but so too are the benefits of conducting such a study – namely, it has elucidated the positive, causal relationship between peer lending and repayment rates.
This highlighted that Kiva U.S. is on the right track with our current social underwriting model. Removing or reducing the Private Fundraising Period might not be the way to further expand access to capital for groups who are traditionally excluded — but we will continue researching to look for other ways to do so. This kind of research could mean finding new ways to help underrepresented borrowers have access to loans that positively impact their livelihoods and communities.
As Learning Collider’s analyses continue, researchers will closely examine peer lending (PFP) requirements from multiple angles to uncover how this variable might be leveraged to increase access to credit. For example, analyses of how PFP requirements interact with other variables, such as loan amount, may uncover pathways to increased access to credit for some individuals – and without compromising repayment rates.
After all, expanding access to credit may also be interpreted as increasing the amount of credit extended to small business owners and entrepreneurs. In the future, we would like to see if our current underwriting may unintentionally be leading to loan amounts that are insufficient, consequently preventing traditionally excluded groups from making the vital business investments needed to scale and improve their financial health.
The evidence for character-based lending is substantial and may be key to uncovering potential plausible “answers” to our original research question. We look forward to future learnings from this study and translating these learnings into both operational and strategic changes to the Kiva U.S. program – changes that will further expand financial inclusion in the U.S.
Finally, we would like to extend our gratitude once more to the Learning Collider team for their expertise, collaboration and insights on this critical question.
You can read more from Learning Collider’s reflections on this study in the articles below:
