Thursday, June 11, 2009

Entrepreneurs in Impoverished Third World Countries Better Credit Risks Than Those In the United States?

I have mixed feelings about Kiva's recent experiments with lending to U.S. based entrepreneurs. I'm going to let that concept roll around in my head and read more about Kiva's own reasoning for the foray before making up my own mind (, Lending Club, Pertuity Direct, and others already seemed to cover that space... and do so as commercial businesses).

However, something else immediately intrigues me: Of the $34,576,235 of loans with completed loan terms to folks in third-world countries, the default rate is 1.6%. Pretty good. While it's not apples to apples (for one, Kiva individuals don't have credit score categories to map into for comparison; secondly, Prosper and Lending Club lend don't loan solely to entrepreneurs), that's actually better than the across-the-board peer-to-peer lending statistics at both (stats) and Lending Club (stats).

What interests me most is how the statistics will look several years: will the U.S. based borrowers have as good a record as the ones from impoverished third world countries?

Another interesting tidbit, which I realize can be partially explained by cost-of-living differences, is that the U.S. based borrowers have far larger loan requests in nearly all cases. Usually $5,000 to $10,000 (though there are some outliers that are $1,000-ish).

The only loans this large from non-U.S. borrowers (which are most of the sample base so this is a pretty accurate set of statistics) are actually from large groups of entrepreneurs who are only borrowing $200-$300 individually in most cases (this group lending is common practice in micro-lending in these types of communities -- it reduces lending risk since peer pressure combined with the other members covering when someone comes up short ensures repayment).

It may be an unpopular, uncomfortable viewpoint, or simply cynical but my gut tells me that a higher percentage of the U.S. based loans will default over several years. Not because they don't mean well but because even the poor in the U.S. take a lot of things for granted. Lots of low-income folks pay for cable television, overpriced hyped cell phones like the iPhone, manage to go to Starbucks everyday, etc.

Don't get me wrong -- I support micro-lending, even domestically. I'll be curious to see the data though. While third-world countries may suffer from the risk of political instability and lack of resource availability, developed nations suffer from taking things for granted and curious personal money management practices. Even our worst off citizens have it better than much of the world's population. That doesn't make either okay but it does provide some context and, I believe, a catalyst for different mindsets when it comes to money management, suffering, and learning from our mistakes.

Micro-lending continues to fascinate me in any case. Especially when it can be done with less overhead using smart software and the Internet. Too much overhead (background checks, interviewing borrowers, checking in regularly to encourage prompt repayment, following up on late payments, etc) relative to the loan amounts has traditionally been one of its main hurdles. One which has tried to break through and commercial peer-to-peer lenders have tried to make viable on-line.


1 comment:

Anonymous said...

I´m Josh Richards & I´m currently a Kiva Fellow in Beirut, till March 2011.
Just came across your article while searching for one of my own - don´t come across many other Josh Richards so thought I´d drop you a line, for no other reason than that! plus I thought the article was interesting too.
Josh Richards.