The Charitable Loan: Why Kiva’s Concept of Microfinance Must Be Regulated

Abstract

The Supreme Court has asserted that term security embodies a flexible rather than a static principle, one that is capable of adaptation to meet countless and variable schemes devised by those who seek use of money of others. Microfinance is such a scheme. The concept of microlending has existed since at least 1970s, but Dr. Muhammad Yunus and his Bangladeshi project, Grameen Bank, did not win Nobel Peace Prize until 2006. Microfinance institutions, or MFIs, seek to ‘include excluded’ in provision of financial services by allowing poor in developing countries to build small businesses and escape poverty. Average Americans serve as creditors by lending money to poor people in developing countries. These people use money to help start or to further develop their small businesses. The borrowers abroad pledge to pay back money to creditors. Lenders through Kiva receive no interest on their loan to borrowers but only principal, while lenders using Microplace can receive up to 3% interest on their loans with a repayment length that may be over three years. Microplace has registered as a broker-dealer with FINRA while Kiva considers itself a charitable organization; federal government regulates Microplace because of its dealings in securities while Kiva remains unregulated. This discrepancy presents a problem because the Securities Act prohibits sale of securities unless company issuing securities (the issuer) has ‘registered’ them with SEC. Kiva, like Microplace, is a member of financial services industry, is involved with issuing securities, and should register securities. Kiva is issuing securities for three reasons. First, Kiva’s status as a nonprofit organization is not consistent with its own professed aims. Second, Kiva does not fall into any of exceptions under act, and finally, loans are either an investment contract or a note under Securities Act of 1933.