Micro-loans for Americans?

SAN FRANCISCO (Fortune) -- When the economic downturn took hold last autumn, the management team at non-profit Kiva.org made a calculated bet to curb investment, anticipating that donors would slow the volume of small loans they make to entrepreneurs in the developing world. That slowdown never came. Now, the non-profit site is racing to keep up with user demand even while planning to bring its unique form of charity to the U.S.

Nearly 500,000 users have lent almost $65 million, interest-free, to developing-world entrepreneurs through Kiva.org. The nearly four-year-old site received a major boost during its early days from a wave of media publicity (including FORTUNE's The only non profit that matters) and the very public endorsement by former President Bill Clinton.

Media attention has waned in the last year or so, but growth has only accelerated due both to friend referrals and loyal users who repeatedly re-loan money rather than withdrawing it. The site distributed $3.5 million last month. "The good news is that we're doing more loans than ever," says Premal Shah, president of the San Francisco-based organization. "The flip side is that we under-estimated demand. [Our growth] rate exceeds the rate at which we can scale."

Kiva takes no cut of the loans allocated for entrepreneurs. Instead, it solicits an optional 10% fee of every loan to help pay salaries and keep the lights on. The organization uses microfinance institution partners to vet entrepreneurs before allowing them to solicit funding. By asking a series of questions to assess roots in the community and the legitimacy of a business, Kiva is able to establish a risk profile for each entrepreneur. Before offering money to, say, the proprietor of a Dominican fruit stand, any lender can read the entrepreneur¹s profile, history of defaults, and a bit about the business.

Default rates are low --­ 2% total ­-- and users can lend a minimum of $25 to any single person. Spreading loans across a series of entrepreneurs further lessens a lender's exposure to risk, and gives more people an opportunity to put money into the system. Lately, however, lenders are putting up more money than Kiva can distribute. Several times in the last month, the site has displayed a message saying there were no entrepreneurs to lend money to.

"This is pretty much a fault of management," says Shah. "We assumed things were really going to fall off. We didn¹t sign up enough microfinance institutions. That turned out to not be the right assumption. There are plenty of poor people out there."

Now, in addition to trying to keep pace in the developing world, Shah and CEO Matt Flannery plan to bring Kiva to the U.S. in the next few months.

They're signing on microfinance partners in the Bay Area and in the Northeast, and are targeting the 30 million or so Americans who don't have bank accounts and the 18 million or so "micro-enterprises" that often rely on high-interest loans or payday advances to buy supplies -- in Shah's words, "folks who don't have a FICA score or a credit history, but run a small enterprise. At least for the last year, we've been thinking, wealth is everywhere, poverty is everywhere. When I was out in West Africa, and I said 'we plan to let you loan to someone in U.S.,' they loved that idea, that money would flow both ways."

Shah is close to signing a partnership agreement with two microfinance institutions, but refuses to name them until the deal is official. The rules will be slightly different once the partners sign on. An American entrepreneur will be able to seek as much as $10,000 (versus just $1,200 in the developing world). And while Kiva has done very well in Africa and elsewhere, Shah isn't totally sure how the effort will fly domestically. "This is definitely a social experiment in the US. I don't know if the secret sauce in Kiva is that $25 goes really far in Uganda," he says.

"Another interesting challenge, you could go drive to south central LA. What if you don¹t get paid? Are you going to go bully those guys?"