What Would a Sustainable Individual Lending and Giving Model Look Like?

"Sustainability, in a broad sense is the ability to maintain a certain process or state." Sustainable development is generally thought of as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs."

If we were to extend these principles down to the level of individuals like us, we could say something like, "Sustainable individual lending and giving meets their requirements in the present without compromising the ability to also meet them in the future." That's a long-winded way of saying a sustainable lending and giving model for us lets us lend and give now without jeopardizing our ability to lend and give in the future. What I'm going to do here is post some thoughts on what a model might look like that would let us, as individuals, keep lending and giving into the future, or at least what a model like this would need to address.

I'm going to start by saying this model can be thought of a way to manage a "fund" - a self-contained pot of money used to issue loans and gifts. I'll consider the model to be sustainable if the fund can "theoretically" be set up with a single lump sum (e.g., $25, $100, $1,000, $10,000, etc.) and then never has to be replenished for most practical purposes.

Simplistically, this fund can be considered sustainable if it starts with an initial capital investment (seed money) and then the total income is at least as large (break even) or larger (growth) than the total expenses. If the total expenses exceed total income in the long run, the model and fund are unsustainable (busted).

By such a definition, individual directed giving alone through sites like DonorsChoose is unsustainable because the fund must periodically be replenished from sources outside itself. Even most nonprofits are unsustainable by this definition because they typically require outside grants and donations to maintain viable operations. This does not make individual directed giving a “bad” thing, it just means it’s dependent on outside funding in order to continue.

For non-interest returning lending platforms like Kiva, the individual return on investment for a loan boils down to "heads I lose, tails I break even." In the long term, the expected value of an average Kiva loan repayment can do nothing but lose money, because no interest is paid to the lender and the average Kiva loan default rate is well above 0%. Kiva requests a donation to its operations fund with every loan transaction and on other occasions on the website. Depending on the country location of a lender, certain funds transfer fees are incurred. In addition, currency exchange losses are possible when lending through some Field Partners.

My conclusion from this characterization of the Kiva experience for individual lenders is that rather than being an individual lender model, it is for all intents and purposes and individual donor model. The Kiva Fund managed by this donor model can do nothing in the long term but become depleted, if not emptied. As such, the individual Kiva lending model on its own also is unsustainable.

One type of purpose-driven solution to unsustainable individual lending and giving models like the ones above is to blend them with income-generating models that also meet the individual's lending objectives. Websites such as MicroPlace offer interest-bearing individual investments in developing country microloans. MicroPlace offers securities with many similarities to money market or certificate of deposit (CD) investments. These investments can have many of the same types of expenses and risks as Kiva loans. However, they fundamentally differ from Kiva in that it is possible for the individual lender to obtain a net gain in income while still offering additional sources of capital to MFIs at or below market rates. Sites like ProFounder allow entrepreneurs to raise capital from their communities as true investments in their enterprises. Various types of financial returns to these lending communities are possible.

The trick to developing a sustainable blended portfolio fund that includes giving through sites like DonorsChoose and lending through sites like Kiva, is to find other loans, investments and revenue that generate sufficient income to offset all lending and giving expenses, plus have sufficient liquidity to move cash among various user accounts. Lending platforms like MicroPlace and ProFounder offer various rates that suggest it is possible to offset at least a sizeable portion of individual lending and giving expenses. MicroPlace even offers an open-ended fund to investors in some locations. Cash accounts like this allow lenders to earn nominal interest with social benefits while waiting for other, more long-term loans or gifts to become available.

So, at least for me, a sustainable individual lending and giving model would allow for the personal satisfaction of helping to make a difference in people’s lives, sufficient income to offset reasonable expenses over the long term, and the liquidity of a cash account to move funds to new loans or gifts when the time is right. I don't see any single platform available today meeting all of these criteria. However, with a little free time and energy, it probably is possible to assemble a blended portfolio that is sustainable. As time goes by and these markets mature, I expect it also will become easier for me to make loans and gifts that change lives, today and tomorrow.

(adapted from a topic at Kiva Friends)