Microloans reach populations that have limited access to financial services, so these types of loans come with some inherent risks for lenders. When you lend money on Kiva, you may lose some or all of your principal. You should be aware of the different types of risk (some of which are outlined below) and find the right loan option for you, with respect to repayment risk and social return.
In order to help reduce your risk exposure, you may wish to diversify your Kiva portfolio, thus reducing your exposure to any one borrower, Field Partner or country. For example, instead of placing $100 with 1 borrower, you may wish to place $25 with 4 borrowers in different countries.
Borrowers on Kiva are vetted or endorsed by either a local Field Partner, Trustee or members of the community.
For loans administered by a Field Partner
The partner looks at a variety of factors (past loan history, village or group reputation, loan purpose, etc.) before deeming a borrower as credit-worthy. However, a number of factors can result in borrowers defaulting, such as:
* Learn more about the Field Partner's role in reviewing loan applications and administering your loan.
For direct loans
Borrowers are endorsed by either a Trustee organization or members of their community in a process we call social underwriting. A borrower must either:
Lenders should be aware that direct loans involve a higher level of risk of default than loans administered through Field Partners for various reasons, including less monitoring and follow up for collection of repayments as well as the stage of business. Many direct loan borrowers are start-up businesses in their first years of operation, which is a particularly challenging and critical time for businesses.
Most of the loans on Kiva are administered by a Field Partner, which means the funds are distributed through one of our local partners working in the community.
The funds are also repaid by borrowers through the Field Partner (please refer to net billing system for more information). While working with Field Partners increases the likelihood that your loan will be effectively used and repaid, new institutional risks are introduced. Even if a Kiva borrower is able to repay, Kiva lenders could still lose principal due to Field Partner issues such as:
* Learn more about Kiva's role in rating and monitoring the risk of each Field Partner
Direct loans on Kiva are not administered by a Field Partner. There are some great benefits to direct loans: for example they are 0% interest to the borrower. But they are also at higher risk of default because there is no Field Partner working on the ground to follow up with the borrower and encourage or collect repayments.
Many direct loan borrowers are also start-up businesses in their first years of operation, which is a particularly challenging and critical time for businesses.
When lending internationally it is important to consider "macro-level" risks:
While Kiva's working currency is the U.S. dollar, many loans are disbursed to borrowers in their local currency, thus adding an additional risk to lenders, especially in times when the U.S. dollar is strong. Please determine if currency exchange loss is possible for a loan. For loans with currency risk possible, lenders bear the risk of loss if the U.S. dollar appreciates by more than 10% against the local currency.
Additionally, if your home currency is not the U.S. dollar, another layer of currency risk is added because loans made through Kiva must be in U.S. dollars. Therefore, the initial conversion from your home currency to USD will add foreign exchange risk.
Note: foreign exchange risk is not present if your local currency is the U.S. dollar and loans are disbursed in U.S. dollars.
There is a potential risk that Kiva, like any organization, may not continue its operations indefinitely. To better protect lenders’ funds in this circumstance and others, lenders’ funds are held by a separate Kiva entity in accounts for the benefit of Kiva lenders who have funds available in the Kiva system (e.g. funds deposited by a lender to make a loan or repayments made by Kiva borrowers to Kiva lenders). We believe that holding lenders’ funds separately from Kiva’s operational funds helps protect these funds from being subject to any claims of Kiva creditors (other than the Kiva lenders who have funds available in the Kiva system).
To learn more about Kiva’s role in the process, and related risks, please go to Kiva’s role.