Challenging the traditional loan model with longer loan terms

While the majority of microfinance models provide short-term credit with a two-year turnaround or less, there is a significant need for long-term finance in the marketplace. Long-term loans of 3 to 15 years, for example, are especially critical when borrowers are looking to finance educational expenses or agricultural investments.

The very nature of education is long-term, whereas agriculture can involve both short- and long-term loans. Longer-term agricultural investments include microforestry, organic conversion and field renewal, to name just a few.

MFIs and other financial institutions are often unable to offer long-term loans, however, because they do not have access to the long-term pools of capital required to sustain these types of loan products. Capital for these products is hard to find at affordable rates and the opportunity cost of not investing in short-term, more profitable loans with available funding can be high.

Because of these constraints, we believe that Kiva lenders have a unique opportunity to rise to the challenge of providing longer term loans for deep social impact by lending directly to borrowers who require patient capital. In order to source these loans, Kiva is partnering directly with agricultural and educational institutions.

One of Kiva’s newest Field Partners, KOMAZA, converts dry lands into productive family tree farms in Eastern Kenya. The organization equips local farmers with the supplies, training, and support they need to plant fast-growing trees on their unused land. Eventual tree sales generate income for their families and create a sustainable wood supply for local markets. Because KOMAZA does not require any money from farmers before their first successful harvest (usually after the sixth year of a 10-year loan), KOMAZA must secure upfront funding to finance tree farms. On Kiva, we’re excited to offer lenders the opportunity to enable the organization expand its impact, support reforestation and help even more families generate income by fundraising for long-term loans on the website.



Komaza farmers planting eucalyptus seedlings.

Paul Thomas, president of KOMAZA, explains the importance of long-term finance for microforestry farmers in Kenya: “Although you can begin harvesting trees and generating revenue in year 3 of a tree farm, you would only earn $7-8 dollars per tree; by delaying the first harvest to year 6, you can earn $50 dollars or more per tree. Farmers view this as a savings account approach.”

Because many institutional funders are reluctant to extend their capital to KOMAZA’s farmers for the 10 years it takes to repay a tree farm loan, Kiva’s partnership with KOMAZA is a critical game-changer, allowing the organization to reach more farmers and increase their impact as their loans are funded on the site.

Another agriculture Field Partner, Union Regional de Huatusco, offers longer-term organic conversion loans and field renewal loans to help farmers transition from conventional to organic coffee production methods or swap out their old coffee plants for new plants. Both of these processes take time and may temporarily reduce crop yields, making it impossible for farmers to repay short-term loans. With Kiva capital, however, farmers can utilize 3- to 5-year loan terms in order to finance organic conversion and field renewal.



Strathmore University students on campus in Kenya.

As with certain agricultural ventures, expanding access to education also prompts the need for long-term loan facilities. A higher education degree typically takes 3 to 4 years to complete, and students may earn little to no income during that time. Accordingly, students often need an extended grace period while they are in school. Furthermore, higher education finance is simply not readily available in many countries. In Kenya, for example, financing a university education is still a big challenge for the majority. While there are some government funds available to finance a portion of tuition, these programs are not sufficient for extremely poor students.

Strathmore University’s Kiva loans target the bright but poor students who would otherwise not be able to afford college. Through Kiva, Strathmore is able to offer an 11-year loan product. These long-term loans include a grace period of up to 5 years, which includes the period of enrollment and the first year after graduation. During this time, the borrower is not be required to make any repayments, so lenders to these loans do not receive repayments.

Long-term loans are an increasingly current issue for many farmers looking to finance their agricultural activities -- and for students looking to access higher education. Both educational and some agricultural loans require a considerably longer investment period, and Kiva is well positioned to address the market gap in long-term debt capital.

Have questions about longer term loans? Send them our way at blog@kiva.org.