Managing delinquency in our direct lending program
As the Kiva Zip program has grown over the past few years we’ve learned a lot about how to make our platform work well. We’ve received many questions about our operations, and more specifically, how we work with borrowers and encourage repayment on loans. Transparency is one of our core values at Kiva, so we hope this blog will give some insight into the way we think about managing borrower delinquency in our direct lending model.
The direct model is based on social underwriting, which means we emphasize our borrowers’ character and community, rather than any imperfect credit history or lack of financial collateral. We implement this principle in multiple ways—by encouraging Trustees to endorse borrowers, requiring borrowers to make a loan themselves to another Kiva Zip borrower, empowering our lender community to choose which borrowers they want to support, and requiring borrowers to invite their personal networks during a Private Fundraising Period.
We believe all of these things are effective ways of managing risk and minimizing delinquency, and we’re always looking for ways to innovate and improve. One great example of this is the Private Fundraising Period. When launching Kiva Zip, we didn’t start out with this concept, but over time we noticed that loans with more invited lenders had significantly higher repayment rates. Loans with just five or more invited lenders consistently average with repayment rates above 91%. With this in mind, we now require all borrowers to go through a Private Fundraising Period before their loan is posted publicly to the Kiva Zip website.
Despite improvements in our risk management, such as the Private Fundraising Period, we will still always have loans that fall behind. That is where our delinquency management comes in. Direct loans are riskier than most loans on Kiva, and to pursue our mission of expanding financial access to the entrepreneurs that need it most, there’s a certain risk that we’re willing to make.
Delinquency management is a necessary and important part of this model and allows lenders to re-lend their funds as we look to grow our reach and impact. In traditional finance, borrowers are subjected to high interest rates, punitive late fees, and inflexible collection methods that don’t allow for the reality of owning a small business. For direct loans on Kiva, we take a different approach. We believe in providing flexible and patient capital, and focusing more on our relationships than interest rates to drive repayment.
Within a week of a borrower missing a scheduled repayment, a member of the Kiva team will reach out to them to create an open channel of communication. If one of our Fellows is in the area, they’re responsible for this follow up. As much of our model is about relationships, we work to create and maintain relationships with borrowers; communication is hugely important to us at all points in the lifecycle of a loan.
Once we’ve started a conversation with the borrower, the goal is understanding the cause of a borrower’s late repayments. Late repayments are often caused by a slow month or an issue in the borrower’s personal life. Business and life can be unpredictable, and we aim to work with borrowers to create a structured payment plan they can follow while moving toward eventual repayment of their loan. Keeping an open line of communication and sticking to these timelines is a large emphasis of our conversations with borrowers.
Kiva is not a collection agency, and our compassionate approach separates us from traditional lenders. Ultimately, we want to see borrowers succeed, and we’re open to re-evaluating payment plans, so long as borrowers are willing to maintain a relationship with us and communicate with their lenders about why they’re unable to repay on time.
In cases where borrowers are non-responsive to this request for an open a line of communication, our team does everything we can to get in touch with them. We make weekly phone calls, emails and text messages to the borrower and Trustee, and reach out through their social media outlets. Our aim is to exhaust all options we have to get in touch.
Right now, the repayment rate for direct loans hovers around 89%, and the majority of borrowers are diligently making repayments and seeing success in their small businesses. Even if they do fall behind on repayment according to their original repayment schedule, on average, over 90% of Kiva Zip borrowers will repay their loans in full.
We’ve been encouraged by our progress and learnings to date. Over the past four years we’ve implemented more social underwriting checks and experimented with ways to increase borrower communication. Going forward we hope to eventually report on business credit as a way to reward fully repaid borrowers and create another incentive for others to repay. We’ve also seen amazing connections and support from lenders on conversations tabs, even when the going gets tough.
We’ve learned a lot from the over $8 million loaned to 1,700 U.S. small businesses, and we’ll continue to learn more as we continue to grow. Together we’re changing the way small business owners access the capital they need to grow, and with your help, we look forward to supporting even more of them in the years to come.