Welcome to week five of this course on Identifying opportunities for social entrepreneurship. This is actually already the last week of the first part of this Social Entrepreneurship MOOC specialization. I really hope that you have liked it and that you will follow up by taking the second and third course that will take you from business model and business plan towards growing the impact of your social enterprise. But now, let's look at what we do today. Last week's optional case assignment has introduced you to the Danish microfinance startup MyC4. Now this week, we will talk about an alternative organization called Kiva which uses a different income model. You may remember that last week Mads Kjær referred to that organization in his first video. The main differences between Kiva and MyC4 are these. Firstly, Kiva does not pay interest to its investors. This means that effectively people who lend money on Kiva can never receive back more than they paid in, although of course they still have a default risk. Secondly, Kiva does not ask for revenue from the beneficiaries to pay for its own operations. Thus, Kiva is effectively a mix between a grant donation income model and a customer based income model. In the first part of today, our students will explore the differences between Kiva and MyC4 and what this implies. Next, you will also meet once again my colleague, Ester Barinaga, who will talk about microfinance in Sweden, and the problems you might have when you try to take an idea from one place and replicate it somewhere else. Microfinance is a phenomenon from the developing world. Now translating that to Sweden, a highly developed country, can be tricky and Ester will talk about her own experiences of trying to do that. Before that, let's have a look into what our students are saying about MyC4 and Kiva and which of the two organizations they prefer. >> I rather like MyC4. I think their approach to eradicating poverty is something I can relate to. What do you say? >> I must admit that I do like Kiva. Yeah, I like that you help the poorest who really need it. Those who don't have any possibility to go to the bank to borrow money and you don't take an interest rate for that. And it does give more money to them. >> I see what you're saying but you could also argue that at MyC4, you can bid me lower, so you don't have to pay a very high interest rate. It's the lowest bid that wins. >> That is true but there's still, I guess, a possibility of exploitation because if you don't have anywhere else to go and there's no cheaper loans, then you would still go for the most expensive one on MyC4. >> Mm, yeah maybe. I see what you're getting at. But there is something which I think really does work for me and that's that MyC4 is so transparent. You can see exactly how much the borrower pays, how much he has to pay the middle man and how much he has to pay the website and the investor. >> True, I appreciate the transparency as well, but I'm a bit worried about the outreach. So it's very focused, you only have Kenya. Whereas you might also want to spread your activities to ensure that you don't go down in a big boom, right? If something fails. >> Yeah. >> Especially with the history I think it's more secure to spread out a bit. >> But I think you do have to take into account that MyC4 is considerably smaller. And I think for an organization of that size, I think they're doing pretty much what they can, so I think it works for me. >> Last week's optional assignment has asked you to look at the income model of MyC4. This task has served two purposes. First of all it helps us think through the alternative income models for social enterprises and particularly to address the No dividend, No loss model of Yunus. When you describe your own income model you will have to be clear about whether your startup will allow for profits to be shared with founders and investors, or whether profit distribution will be restricted. Even a cursory study of the two websites, Kiva and MyC4, will reveal the main differences between Kiva and MyC4. On MyC4, investors can ask for an interest rate for the money they lend. They first have, in theory, the possibility to make a profit of their investment. If you did some more research, you may also have found that MyC4 is owned by shareholders who also intended to make a profit from their investment once the website would have become profitable. Kiva on the other hand is different. It is registered in the U.S. as a non-profit organization that can never pay out dividends. More importantly, investors in Kiva cannot receive interest, although they will receive the capital back of the money they have invested, once the borrower has repaid the loan. By forgoing interest payments, Kiva borrowers effectively make a donation in the amount of the opportunity costs of their investment. By opportunity costs, we refer to the money these people could have made from investing, for example, into a bank or shares on the stock exchange. If we assume that Kiva users could have received, for example, a 2% interest rate from their bank, then effectively they donate $2 on every $100 they invest on Kiva. However, users also bear the risk of loan defaults. In such a case, the amount of money lost could theoretically be the whole amount invested on Kiva. In practice, investors in Kiva have in the past have only experienced very minor default risk amounting to just a few percentage points. So far we can think of the difference between Kiva and MyC4 in the terms of their income models. Which one you prefer depends on your own values and motivations. What looks, at first glance, as a clear-cut difference, however, becomes more muddled once we dig deeper into the two income models. If you have attempted to look a bit more at Kiva, you will realize that from the borrower's perspective, the situation is not quite so clear. Both websites use intermediaries who take care of delivering the loans to the final borrowers. These intermediaries are allowed to and actually do charge interest rates to borrowers, even those on the Kiva website. And in fact, these interest rates can be quite substantial. Thus, in effect, the Kiva model does provide cheap capital to the intermediaries, who can decide to pass on the lower credit costs, but they might not do so. What is important in this context is the so called annual percentage rate, APR, paid for by the borrowers. This is the actual cost the beneficiaries bear. In theory we should assume that Kiva loans could have lower APRs than many MyC4 loans because Kiva uses the no dividend model. However, in reality we find that many intermediaries on Kiva are worried about the Kiva default ranking. Deteriorating scores could have very bad consequences for these intermediaries. Therefore, Kiva intermediaries tend to take on the losses that they have in order to keep their default rating to look positive on the Kiva website. Moreover, loans made through either Kiva or MyC4 are subject to currency risk. If loans are made in the local currency, then borrowers may repay the full loan, although due to currency changes this does not mean that the capital provided by the investor is repaid in full. Kiva intermediaries typically absorb currency losses. That way protecting Kiva investors from currency risk. On MyC4, investors had to bare both the full currency risk and the full default risk. Although the theoretical profit potential on MyC4 was higher, the risks were also considerably higher. Now interestingly, MyC4 offered two tools to investors that Kiva investors do not have. Kiva only gives information about the average APR, the interest rate, at the intermediary level. MYC4 went further and allowed each user to see exactly how much a borrower paid for each loan. MyC4 also allowed investors to set their own interest rates. In this reverse auction, actually borrowers could bid down the interest rate on each loan. An important advantage of MyC4 is its higher transparency and the direct link to the borrowers. However, given that MyC4 itself made money from lending, the website was also exposed to risky incentives and this caused its trouble. Actually the more loans MyC4 dispersed, the bigger its profit potential was. Unfortunately, driven by this exuberance, MyC4 has handed out many microloans through intermediaries who again were primarily motivated by an incentive scheme that generated income. The more loans were dispersed, the more money they made. As a result, many microloans were given to people who did not have the possibility to repay them. This led to high defaults in countries such as Sierra Leone and Uganda. Moreover, in Kenya, MyC4 fell victim to systematic fraud resulting in the complete loss of all loans made through the local partners. Recently, MyC4 has tried to recover some of those funds, but so far it is far from clear whether the website will be able to avoid default. Finally, both Kiva and MyC4 have so far failed to provide us with convincing evidence that their microfinance loans actually contribute to fighting poverty. While such an assumption might sound reasonable to you, there is little to no systematic evidence as to what happens to borrowers after they have repaid their loans. Let's think of this example. If somebody has 10 chickens and borrows money to buy another 10 chickens, they will have 20 chickens. Over time, as they repay their loan, they might have to sell 12 chickens in order to be able to repay the loan. At the end of the period, they will be left with only eight chickens. Typically, in the microfinance world, this will be counted as a success because the loan was successfully repaid. Obviously, the borrower will be poorer than they were before. Measuring the social impact of microfinance is very difficult. Often, microfinance will have to measure social impacts at a very detailed level, but this isn't always possible in income models such as Kiva and MyC4 where there's not a lot of funds available. Later in the specialization, we will spend time talking about how to measure social impact and how to make sure that your social enterprise actually has a positive impact on its social outcomes. For today, we will just work with the theory of change that you're starting to sketch now.
