The management of innovation

-Final Report -



Frugal innovation




Sofie Holm F99248102
Yi-ting Wang 400416073
Ching-Yun Ting 400416097

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B Do poor people need financial services?
!oor people don't have the access to use formal financial
services. So what do they do instead? For example poor people
save money by investing in jewelry, gold, domestic animals,
building materials or other things that easily can be exchanged for
cash. To save money they might bury cash in the garden or stash
it under the mattress. Some is participating in informal saving
groups where a small amount of cash is contributed every day,
week or month or asking neighbors to hold or pay local cash
collectors to keep the money safe. But these informal savings is
not a very dependable and a safe way to rely on. For example can
it be difficult to get fast money if they suddenly needs a small
amount of cash. In-kind savings is in the risk of fluctuations in
commodity prices, destruction by insects, fire, thieves and illness.
Informal rotating savings groups tend to be small and rotate
limited amounts of money. This is why the formal financial
institutions also play an important role for the poor people.
B About Microfinance
1. at is microfinance?
icrofinance is a provision of different basic financial services
to individuals with low-income or who lack access to traditional
formal banking services. These basic financial services is usually
small loans and savings. The amount of money is small (micro)
because the ability for poor people to handle and pay back larger
loans is a risky business both for the lender as for the borrower.
Especially since poor people often have the lack of knowledge and
no assets to fall back on.
2. at is microcredit?
icrocredit is a financial service in the category of microfinance
and means small loans, microloans. These loans are often given to
support entrepreneurship (like Kiva does).
3. History:
The concept of modern microfinance and microcredit was
developed in the 1970s by Dr. ohammad Yunus. He was a

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professor of economics in Bangladesh who was experimenting with
lending money to poor women. Yunus later founded the institution
of Grameen Bank in 1983, which provides microcredit and in 2006
he won the Nobel !eace !rize.
4. MIcrofinance Institutions:
rganizations that provides microfinance services is called
icrofinance Institutions (FI). It includes both non-profit
organizations like Kiva and commercial banks like Grameen Bank
in Bangladesh and Bancosol in Bolivia. Although it is very few
formal banks which provides this kind of service, since the
possibility to make more money is greater on large loans than on
small ones.
5. Cost and Interest Rates:
When providing a microcredit, the icrofinance Institution
needs to be sure that the cost of the loan is covered, as for any kind
of loans. This leads to a much higher interest rate than when taking
a larger loan. The reason is the different kinds of costs that needs
to be covered when a microloan is made.
The costs can be devised into three types: 1) the cost of the
money that it lends 2) the cost of loan defaults and 3) transaction
cost. The first two are proportional with the amount of lent, since
the cost of money and the cost of loan defaults both increases with
a larger loan. The third one, the transaction costs, is not
proportional. Transaction costs include costs for the staff for
handling the appeasement, the disbursement, the repayment and
the follow-up monitoring for the loan. These costs are basically the
same no matter how large or small loan it is. It still take the same
amount of time to make the transaction, and that is the reason for
why the interest rates for microcredit gets higher - to return the
cost of the loan.
6. Target market:
The target market for microfinance has become to be directed
to women. The reason for that is evidence from studies show that
women more often manage to default on the loans than men. This
also send a strong message to households and to communities to

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empower women`s position.
7. Benefits:
The benefits with microfinance can be many. The purpose is to
help poor people to get a better and more secure life.
The reason for people to lend money can depend on different
needs. For example lend money to be able to handle everyday
crises, so called lifecycle needs such as weddings, funerals,
childbirth, homebuilding, widowhood and old age. It can be needs
because of personal emergencies, such as sickness, injury,
unemployment, theft, harassment or death. ther types of
incidents that might cause a need of money can be disasters, such
as fires, floods, cyclones and man-made events like war or building
of dwellings or investment opportunities like expanding a business,
buying land or equipment, improving housing or securing a job.
The microfinance can help getting started with a business and
support it, which in the long run can get the borrower out of
poverty. As mentioned before, saving money or taking a loan from
an icrofinance Institution is also a more safe way than lending
money from people in your neighborhood or to dig down the
savings in the garden.
Another benefit can also be that it's easier and quicker to take
a microloan instead of selling possessions, like a goat or jewelry, to
a buyer who is willing to pay the right price. This therefore
contributes to increasing people's well-being.
Another benefit that microfinance can induce is as mentioned
before to empowering women. Since microfinance institutions
wants to provide the service through women, it increases their
status when playing stronger roles in decision making, both in the
family but also in the community. Women now own possessions
like land and housing which makes them more powerful than
before.
And for the global- and long-term goal, studies shows that
microfinance helps people get out of poverty.
8. Disadvantaged/Problems:
icrofinance can only be provided for those who are most
likely to repay the loan under the terms that is required. Therefor

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people or populations with high level of diseases, like HIV/AIDS, or
geographically scattered or nomadic may not be approved
microfinance services. Unable to repay a loan does not only affect
the lender but also the borrower who then also have debt problems
and is getting pushed into even moor financial problems than
before.
ther factors that have an impact on the decision of approving
a microfinancial service are the country's situation about
hyperinflation, law, order and regulations.
B About Kiva
1. Te Kiva's background :
Basically Kiva made a website platform to connect the people who
need help and the people who willing to help.
Through local microfinance institution, the Kiva gets the
information of clients (the people who need help) and post it on the
website, we can see every basic data on it and decided who we are
going to donate. The whole how Kiva works will be introduce later.
The Kiva is an non-profit organization with a mission to connect
people through lending money, that helps people can release some
difficulty for the life.
They use the internet and a worldwide network of microfinance
institutions, Kiva lets individuals lend as little as $25 to help create
opportunity around the world.
There headquarters is in USA, Kiva have Field partner in all over
the world, located in 60 different countries. For example'Africa, South
Africa, Asia, Central America, North America , iddle East, Eastern
Europe.
There are 81.35% of Kivas loan women entrepreneurs


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2. Te objective of Kiva :
They hope the people all over the world - even in the really far
away areas - have the power to create opportunity for themselves and
others.
They believe providing safe, affordable access to capital to those
in need helps people create better lives for themselves and their
families.
3. How Kiva funded :
100% of every dollar the people lends on Kiva goes directly
towards funding loans; Kiva does not take a cut. Furthermore, Kiva
does not charge interest to their Field !artners (icrofinance).
The major funded through the support of lenders making optional
donations. They also raise funds through government, corporate
sponsors, and foundations.
There are many famous corporate sponsors like Face book,
Starbucks, Google.etc.

What Kiva get from their sponsors ?
Google 'Kiva gets free advertising through Google. This
partnership allows Kiva to attract new lenders by
promoting the website, and this help Kiva continue their
success.
Microsoft icrosoft helps Kiva's Field !artner when
they are facing software problems. Also they do R&D to
fund some useful software which is used in Kiva. Loan
officers in Uganda are currently piloting the use of
camera phones with ultimedia essaging Service
(S) protocol to relay field information
instantaneously to Kiva's website.
Facebook 'Kiva partners with Facebook to reach

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thousands of Kiva community members through
Facebook Causes and Beacon. Causes allows Kiva
supporters to connect with each other on Facebook;
Beacon gives Kiva lenders the option to spread the
word about Kiva and their activities on Kiva to their
Facebook network.
StarbucksAs Community !artner of the Starbucks
store at Bay & Taylor, San Francisco, Kiva holds regular
in-store awareness events to share Kiva with Starbucks
customers. The Starbucks partnership is Kiva's first
venture into the retail space and we look forward to
building communities and networks of lenders,
facilitated by Starbucks' Community !artner events
and promotions.
4. How does Kiva function?
Helping the poor has become every citizens rights and
responsibility, therefore, after new ideas generated by an Indian
professor who won Nobel !rice, organizations such as KIVA show up
quickly. In our opinion, numerous amount of people and communities
pioneer and advocate in investing their fund to the small enterprises
in the third world, which has dramatically improved the world to be a
better one. As we learn from the website, communities such as
"Non-religions, "Christians, "Team Europe, "Team bama, and
"GLBT (Gay, Lesbian, bisexual, Transgender) etc., have found
another way to express their willingness to help the world, and also
gain their publicity.

Here wit steps to describe ow it functions:
1. Kiva !artners with a icrofinance Institution
2. Field !artners Disburse Loans and Upload Stories
3. Lenders Browse !rofiles and Lend
4. Kiva Disburses Lenders' Funds to the Field !artner
5. Entrepreneurs Repay Their Loans
6. Kiva !rovides Repayments to Lenders

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Kiva partners with existing microfinance institutions around the
world (Field !artners). These organizations that have expertise in
microfinance and a mission to alleviate poverty facilitate Kiva loans on
the ground.
Field !artners know their local area and clients and do all the leg
work required to get Kiva loans to the entrepreneurs posted on
Kiva.org. And after that, Field !artners disburse loans as soon as they
are needed. They can do this up to 30 days before the loan request is
posted on Kiva's website or 30 days after. The Field !artner collects
entrepreneur stories, pictures and loan details and uploads them to
Kiva.
Volunteer editors and translators review the loan requests and
publish them to Kiva.org. any Field !artners require mandatory
savings as part of the loan cycle in order to ensure that borrowers
represent a good lending risk and can build up cash reserves.
5. KIVA risk and Due Diligence wic takes in account
wen coosing clients:

Kiva has a repayment rate of 98,75%. ne reason for this high
repayment risk may be that Kiva take three different risks into
account before lending money to its customers: 1) Entrepreneur
risk, 2) filed partner risk and 3) country risk.
The risks are similar to the ones we went through before. The
entrepreneur risk includes factors like past loan history, village or
group reputation, feasibility of business idea etc. However, a
number of factors can result in entrepreneurs defaulting: business
issues, health issues and other issues like paying for school. The
second risk is the partner field risk, which means that kiva lenders
still could loose money due to bankruptcy (the field partner go out
of business and is unable to collect your loan), fraud (staff or
members of a field partner may embezzle the funds) or poor
operations (poor metrologies for screening entrepreneurs or
collecting repayments).
For this reason, Kiva assigns each field partner a risk rating
from a 1-star (high risk) to 5-star (low risk). The third risk, the
country risk, includes the macro-level risk. For example the

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economical factor including the currency devaluation or the
institution exchange controls by local governments. The political
may change regarding funds repatriation or natural disasters like
tsunami may reduce the repayment.
For this Kiva has a limit of no more than 10% of total loans can
be target in a country. This to balance the portfolio.



I. Two cases of at Kiva ave done
We are going to share two success cases in Kiva and these people
have already repaid their entire loan.
1. Grace's Peanut Butter
Grace Ayaa is a mother of 13 kids who lives in Uganda. She cares for
13 children, 7 of whom are not her own but orphans of the civil war,
and now adopted into her family.

Grace tried to support herself and her family making peanut butter
using a mortar and pestle. The process was so slow, and batch of
produce so small, that it was very difficult to make the peanut butter
fast enough to earn enough money to cover living costs for her and
her family.

Grace knew she had to change her processes for her business to be
successful, so she saved enough money to purchase a processing
machine, no longer grinding with a mortar and pestle. With her new
investment she was able to make much larger batches of peanut
butter more quickly than before, but she had no way of storing her
peanut butter and therefore could not make more until her current
batch had sold.

Grace took a loan of $475 through Kiva, administered by Life in Africa,
a Kiva Field !artner. Grace intended to spend 50% of her loan to
purchase a refrigerator to store the larger batches of peanut butter,
25% on packing materials and an additional 25% as working capital
for her business.

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Within six months Grace had employed an additional person to help
her with her business. She was also able to save enough money with
her increased profits to acquire a small piece of land, so that she could
better care for her children who were growing up quickly.

Grace has become an example in her community of a successful
woman, despite the difficulties she has faced. Grace is no longer
forced to decide which children she can send to school each semester
as she can afford to send them all, and she is now building a home for
her family on the land she was able to purchase.
2. Angel's Bicycle Repairs
Angel Asenov is 30 year old young man living in Sliven, Bulgaria,
where he had worked in a bicycle repair store for 15 years. Like many
young men he dreamed of running his own business, but every one of
the six banks in Sliven refused him a loan to start his own bicycle
repair store.
Angel received a loan through Kiva. Angel spent the $850 loan on
equipment he needed to buy (welding tools, wrenches, screwdrivers,
saws, hammers and some bike-specific tools), inventory for the store
(rubber, spare parts) and a modest renovation on the part of his
house he converted into a shop front.
To advertise his new business he organized a bike race within his
community, which 100 children attended. When the cold months
came Angel recongized that he could do much more with his welding
tools than just fixing bikes, and he became the metalworking
man-about-town.

Angel fully repaid his loan within 12 months, and with his success he
has been able to hire his brother part-time, perform some simple
renovations on their home and invest in his supplemental
metalworking business. Angel's success - as a Roma - was so
astounding to the public that his story made the Bulgarian national
paper.