Introduction

Credit markets present a particularly well-defined credibility problem because outcomes are transparent (repayment), and both borrower and lender must sustain a reputation in order to permit the leveraging of capital. Institutions such as credit bureaus and credit ratings agencies exist in order to provide measures of the quality of borrowers and of banks. In the new NGO-driven microfinance lending sector, this well-defined problem becomes more complex because investors seek a double bottom line, pursuing social as well as financial gains. This introduces a fundamentally different form of credibility problem, one related more broadly to the humanitarian NGO problem of assuring donors of the social efficacy of their interventions. Nonprofit microfinance institutions (MFIs) solicit direct donations or investments from private individuals, typically using social benefits to the borrowers as motivation. Recent evaluation studies that have failed to find a transformative impact of microfinance have raised questions about these claims (Banerjee et al. 2009; Karlan and Zinman 2009), and complicated the question of whether we should think of microfinance as a financial service or a humanitarian activity.

Peer-to-peer (P2P) microfinance is a new modality that has emerged in recent years, allowing private parties to provide lending capital directly through the Internet to borrowers in developing countries (Bruett 2007; Flannery 2007). The institution is created by linking local NGOs (developing-country MFIs) with an international NGO monitor/fundraiser (the P2P institution). The best-established microfinance P2P lender in the United States is Kiva.org. To use it, individuals go online to view details on the loan terms and business investment of an individual entrepreneur in the developing world, as well as a picture and some personal information of the entrepreneur, and the repayment performance and financial details of the MFI sourcing the actual loan on the ground. Loans made through Kiva are zero interest both for the lender and for Kiva itself, while the loan to the entrepreneur is made at the MFI’s typical rates. The entrepreneur then repays the MFI and the MFI repays the P2P institution, and the original lender can then either reloan the principal or donate it to Kiva’s operations. The five-year-old organization has lent $100 million to 200,000 borrowers with repayment rates of more than 98 percent.