Kiva is a nonprofit organization that accepts donations to crowdfund loans around the world. It was founded in 2005 when Premal Shah recognized that small business owners in developing countries didnt have access to funding. Kiva takes donations on its site from people around the world who can donate a minimum of $25 for specific projects. Money is then given to recipients who are expected to pay back the loan over a set period of time. As the loan is paid back, the original lenders can then either withdraw the money they donated page 500 or use it to fund another loan. Kiva now backs thousands of loans each week at a variety of price points and has surpassed $1 billion in loans. Most Kiva loans go to help recipients build inventory or buy assets that will improve their productivity. Technology is constantly changing the world around us. This is true in the financial world, too. Traditional banks and other financial financial entities are competing with new structures, like Kiva, that can provide similar services in an innovative way. By using crowdfunding on the Internet to award loans to broader audiences, Kiva has found a way to innovate in the financial loan industry. This is a form of shadow banking, where a company performs banking functions, like awarding loans, when the company is not a traditional banking institution and is not encumbered by traditional banking regulations. Lenders like Kiva, known as peer-to-peer lenders, create a human connection. Even though Kiva does not have to follow many traditional banking regulations, the company must comply with regulations imposed by countries around the world that they are operating in. Developing countries often have poor regulations that increase costs for Kiva and complicate the loan process. For example, money invested in India must stay in India for at least three years, which can create major cash flow problems. Another challenge for Kiva is dealing with infrastructure. These countries have very poor financial infrastructure systems, which is another challenge that Kiva has to overcome when trying to fund those in need. While Kiva faces many challenges to operate in developing countries, it also faces challenges in the United States. Kiva started operating in the U.S. in 2010 when it recognized a need for a nontraditional loan financing system domestically. While the U.S. is one of the best countries in the world to start a small businesses and secure capital, young people without a credit history and immigrants often have trouble securing loans for their businesses. Kiva now aims to aid those who cant secure a traditional loan in the United States through its existing crowdfunded loan system. One of the most fascinating aspects of the Kiva system is Kivas choice to crowdfund loans instead of using donations. While donations are very helpful for aiding crisis efforts and natural disaster relief, Kiva believes that lending is a more effective way to combat poverty. The company believes that by lending, recipients will have a stable and ongoing source of capital for their business. Loan recipients can also use their Kiva loans as a credit history in order to try and secure loans with traditional financial institutions. Because of the payback structure of Kivas loans, Kiva is able to reinvest money that is paid back to fund other projects. Access to capital isnt enough to end global poverty, but it is clearly necessary, says Elliot Collins, a research and evaluations manager for Kiva. Kivas network is reducing the cost of lending to entrepreneurs around the world, and our goal is to ensure that everybody can benefit from financial markets and help build their local economy. Thanks to its innovative take on crowdfunding loans, Kiva is able to reach those in need all around the world. Donors can give money and then reinvest paid back loans into other projects. Because of Kivas nontraditional structure, it is able to avoid many banking regulations. However, Kiva continues faces many challenges due to different government regulations and infrastructures. To stay competitive across the world, Kiva must continue to monitor regulations in the countries in which it operates and pay close attention to how governments will treat shadow banking entities in the future.

Critical Thinking Questions

1.Explain the benefit of awarding loans instead of donations.

2.What are the differences between Kiva and more traditional financial institutions?

3.What challenges does Kiva currently face, and what future challenges could it face?