How to chose loans and make lending decisions

Many questions have been asked about how to choose loans, what is the basis for one versus another, and how to make the entire Kiva thing work.

Please make this thread only about the lending decision. Any other questions please direct to this thread:
http://milepoint.com/forums/threads...h-kiva-and-got-questions-ask-them-here.11391/

In the immediately following posts are a handful of critical Kiva pages you can use to understand more.

http://www.kiva.org/about/how

This page explains basically how Kiva works. If you have the time to read it, this will answer many critical questions.

Please ask us any questions you may have about these explanations.

http://www.kiva.org/about/microfinance

This explains the basics of microfinance. If this is not enough explanation just ask.

i personally have been involved with microfinance for more than thirty years, so be careful what you ask. I might go overboard with explanations.

http://www.kiva.org/partners

Kiva field partners are the organizations that actually make the loans and manage the process. They are one of the least well understood parts of the business but are the primary key to success of loans and success in helping people lift themselves out of poverty. If you have no time to read other parts, please read about field partners.

http://www.kiva.org/about/risk

Kiva has made a very good description of the primary risks and how Kiva helps manage them. If any of this is not clear please just ask about it.

When looking for a new loan I tend to use quite a long time selecting - probably more than need be.

I primarily look at the use for the loan. I prioritize loans that can benefit the societies while also benefiting the loaner. For example small shop owners looking to expand inventories, pharmacies, agriculture and the like. I do not lend to personal use like weddings and what not people borrow to, but that's just my preference.
My preference is to loan to people in countries I know are very poor.

I also look at the Kiva Field Partners handling the loans in the field. I look at their track record and their Portfolio Yield. I select for trustworthiness and for a low portfolio yield.

Based on that I go with my heart and intuition

When I made my first loan, I looked at loans other MPers had made at http://www.kiva.org/team/milepoint/loans. While I don't know other MPers personally, I trusted the judgement of some that I see had been making loans longer.

That's what I did as well... figured someone had already done the homework and jumped in with people that other MP members had already loaned to.

I figured if I spent too much time looking at the risk factors or other data I'd end up spending an hour and getting overwhelmed with choices, so I just grabbed a couple of people that were close to their goals and went with that.

I also looked at loans that would go for something real that could benefit a person, not for something like a wedding or what not that doesn't need excess money spent on it...

In the end, I'm doing as Jesus asked, "Do unto others as you would do unto me"... so just glad to help others who need help as I've been very blessed always in life

I'll admit that I am also a little selfish in looking at "what" the $$ is going for. You need furniture or to paint the house... not my thing. I want to "teach you to fish" not "give you a fish".

Well at the end of the day it's a loan, so while $25 might not take any food off anybody's plate (here), you'd still be pretty ticked off if it wasn't repaid. And the way I figure, money that goes towards a business enterprise -- whether you wanna buy a donkey or manure -- is a better "investment" as a loan.

Well said. Back in the dark ages when I was in the credit training program of a major bank (the program was a year and a half long, imagine that today) we learned about the three "C's" of credit: Character, Capacity and Common Sense. I still think about those. In lending, Kiva or elsewhere I think hard about the purpose of the loan. If it will not provide a basis for earning more money to spend on things like better housing, sanitation and education I do not lend. Thus I very rarely lend for housing. I never lend to support domestic consumer needs. Those things are necessary, and for some charitable activity I will help provide them, but not for loans.

I've been debating whether or not to join Kiva for a variety of reasons. Whenever I make an investment I study it a lot because I want to make a good investment. I like the idea of Kiva, in principal - here the return on investment is helping eliminate poverty.

However, as lenders, how do we maximize this return? This is what I've been debating with myself. Is Kiva the best way to maximize the impact of our dollars? I still haven't come to a decision yet, but I thought I would share an article that I had read recently, and I think that it could help others make the decision on which loans to fund.

The article specifically points out that not all people who appear to be in poverty actually are. Here's an excerpt:

Full Article

The article also links to this website about evidence-based charity - e.g. what kind of investments/charity actually do help people in the long run. Here it is http://www.poverty-action.org/
I think its worth reading what that web-site has to offer and then applying that kind of thinking to the Kiva loans.

Well in a way the article is right... some of the people these loans are helping are very well off, compared to their respective national average or even their neighbors, but at the end of the day I look at it as one of those "what else can I do?" type of situations.

As much as some people would like to help, very, very few actually would roll up their sleeves and go to a third world country and do something. And even then, when you look at the big picture you get a sense that it would take a lot more -- a lot of people spending a lot of time and effort -- to actually make an impact. You get that feeling every time you go to "the wrong part of town" in places like Jamaica or Mexico, let alone some of the places you see at Kiva.

But -- and again this is my opinion -- doing something like this, albeit it might seem like small potatoes or maybe helping the middle class (rather than the truly "poor") helps, even if a little bit. Who knows, maybe that guy with the store that you're helping is now doing better off and he can extend credit to more people that come purchase groceries or whatever.

I agree completely. How one donates to charity or participates in Microfinance lending is a very personal decision. It's up to each person to decide how/what their money should be used for. I just thought I would share something that has been informing my decision making process.

Kiva is great because you know exactly where your money is going and what its being used for. And it is certainly more personal that donating to a large charity organization.

To add to your "small potatoes" argument is that small potatoes can add up to a big potato salad that can feed a lot of people Maybe giving a loan to that vegetable vendor to upgrade from a blanket to a table will enable that person to give someone else a job to help carry that table... etc...

I think I may have just talked myself into joining Kiva...

I applaud the thorough effort to make good decisions regarding all philanthropic activity. Dean Karlan, in particular, has been a major influence in my thinking. He has advocated a rigorous approach based on proven results, not just theory. His website gives some more perspective on his approach: http://karlan.yale.edu/

It is not enough just to write checks. One of the reasons I like Kiva is that I understand their tools and like to use them. That is not true for all people. Probably the majority of givers do not do too much homework.

However a number of good tools exist for people who want to know more:
Here is one that discusses Microfinance from a supporters view (It was written for a MicroFinance conference, after all):
http://www.microfinancegateway.org/gm/document-1.9.26627/35795_file_MicrocreditSummit_P.pdf

If you are really serious and want to study the subject as an academic would here is a good text:
http://www.amazon.com/gp/product/02...f=pd_bbs_1/102-0541405-9787328?_encoding=UTF8

Mixmarket evaluates specific microlenders fro their efficacy and efficiency as well as creditworthiness. Almost all Kiva filed partners are analyzed here. (I do not lend through field partners before looking at them here):
http://www.mixmarket.org/

The ones I listed are all oriented to finding what kind of activity works for microfinance and how to evaluate effectiveness. The Dean Karlan initiatives are broader ones and work to a better understanding of what kind of philanthropy works best in different situations. That is, in microfinance situations, it is useless to lend money to people who are very sick or completely impoverished. People can only use loans if they have enough resources already to benefit. One superb example of efforts to assist the truly destitute and help with the intractible problems is the Bill and Melinda Gates Foundation. http://www.gatesfoundation.org/Pages/home.aspx

If you have you've done it through careful thinking, clear reasoning and with understanding of the limitations of the approach. That will make you a better lender!

BTW, may I be so bold as to recommend Doctors Without Borders as a very good way to help those who are too sick to help themselves, too devastated by natural or manmade calamity to help themselves?

An update on credit risk and Field Partner choices. I now have 412 loans outstanding. I have have never had a loss, but I do have five loans delinquent.

I have two Field Patners in Bolivia and one delinquent loan for each. That has happened from time to time, but they have always cured within a month or so. The delinquencies appear to be the result of payment timing issues rather than credit problems.

A single Field Partner Angkor Microfinance Kampuchea (AMKI) has three delinquent loans. That has happened before although so far the loans have eventually cured. I am no longer lending through them, partly because there are plentiful microfinance sources there and many borrowers who are borroqwing from more than one mocrofinance source. despite the obviosu needs in Cambodia I am losing my confidence in the efficacy of microfiannce there just because of the plethora of lenders.

These are my experiences only, and I am stating my opinions, but other people may have different opinions and different experiences. I am not trying to promote my conclusions, just report them.

Pick an area. I favor the Americas, the Caribbean and Israel. I then look at repayment length (you can sort on that). My idea loan is 12 to 18 months, but I range from 6 to 36. My average is around 16 months. Next I always pick someone less than 50% funded. Finally I try to balance the sexes so if my last loan was to a male the next is to a group or a female. Right now I am too heavy in retail. I try to mix purposes. I do not loan for personal use.

Two weeks on I thought an update on my delinquencies is in order. I now have 549 loans outstanding, of which four are delinquent. One of my two in Bolivia has cured, and the other one seems unlikely to actually default because he has already paid 61% of the loan and he's only a few days late this time.

The situation in Cambodia with Field Partner AMK is not as good. There are three delinquent loans through them, and all three failed to make a complete first payment, and paid even less of the second payment. All three did pay something on both payments, but all three did not even make the first payment in full. I reaffirm my intention to no longer lend through AMK and Cambodia due to the overcapacity for microfinance there.

The really good news is that these four are my only delinquent loans. It is a pleasure to see people building better lives, successfully managing their affairs in difficult conditions.

With only 39 loans I had one delinquency. The borrower missed his first payment. He cured it and made his second payment on time. He is no longer delinquent.

My goal is to have 48 loans outstanding and I expect to often have one delinquent. Some of the loans I pick appear to be higher risk than others so eventually I will see a default.

Since we do this to help people and get no return on our investment beyond extreme personal satisfaction, a default or two is just part of the price.

I almost let that first delinquency get to me. I got past it however by making two new loans.

I look at the length of repayment. Usually the group loans repay in about 4-5 months. I prefer those over the longer duration ones. After that I look for people who want to open some sort of food business...either a bar, grocery store, or restaurant.

Don't forget to check the history of the Field Partner. The best Field Partners both screen their customers and work with them to help them avoid assuming debt they cannot repay. IMO it is crucially important for new borrowers to learn the disciplines associated with borrowing money. Default can be a horrible blow to self esteem as well as a disaster to economic well being. By checking the Field Partner history you make the situation better for everyone. Nobody gains in a default, unless there is fraud, of course.

Don't tie your self esteem to loan status. We pick loans from those selected by Field Partners. Some five star partners (http://www.kiva.org/partners) have delinquent and defaulted loans. Where a good partner may have a 99% + track record, if you invest in that 0.1% or less that goes into default, you have a defaulted loan. If your luck is bad and that is your only loan, then 100% of your loans are indefault.

Keep your individual loan investments low enough so if a loan goes bad for you it is not an economic disaster. Assume that 5% of your loans will go bad. Likely number is less than 2% (curren repayment rate is 98.7%). If you invest $1,000 in 40 $25 loans, at 5% just $50 will be in default. At 2%, no more than $25 should be at risk of loss.

So loan away and don't worry about losses. Take some risk with countries and people most in need. Your default rate may go up, but the satisfaction you'll get is worth the risk.