I’ve been contributing to Kiva for a number of months now, and am
sufficiently appreciative of them to want to tell others about them. The
short version is that Kiva is a distributed, peer-to-peer microlending
non-profit with the goal of alleviating global poverty.
§ Microlending
Microfinance is the practice of providing financial services to people in
low-income parts of the world who are not generally considered
profitable-enough customers to warrant service from traditional banking
institutions.
Microlending (or microcredit) is a subset of microfinance that provides
loans to low-income people, typically entrepreneurs in low-income area of
the world, who do not have access to loans from traditional banking
sources. Sometimes there simply are no banks in the area, but more
typically the entrepreneurs don’t make enough money to qualify for loans,
don’t have sufficient collateral, or don’t have a sufficient credit
history. Modern microlending started in the 1970s with the
Bangladesh-based Grameen Bank.
The advantages of microlending over traditional aid programs are in its
benefits to developing economies: it encourages growth of local
businesses, puts more money into local economies, encourages local
employment opportunities, and gives entrepreneurs a foothold to establish
their businesses and a credit record. In some areas, it provides an
alternative to tribal moneylenders, who charge high interest rates and
respond to repayment failures with physical violence. In short,
traditional aid addresses people’s basic needs: food, shelter, clothing,
education, sustainable agriculture; while microlending works on the next
step of growing local economies.
§ Kiva’s contribution
Kiva was created as the first distributed, peer-to-peer microlending
organization in the world. It’s peer-to-peer because all Kiva does is
list loan applicants on their website; it’s up to the users of the website
to supply the money to fund the loans. As the loans are repaid, those
repayments go to the people who supplied the money. Kiva is distributed
because the funding for any given loan is made up of contributions from
many different Kiva users. (And as the loan is repaid, each contributor
is repaid according to his or her portion of the overall loan.)
The actual process is a little more involved. Kiva doesn’t make loans
directly. Instead, they partner with microfinance institutions (MFIs) in
other countries. The MFIs accept loan applications, evaluate the
applicants, disburse loans, and collect payments. During this process,
the MFIs tell Kiva about the loans in batches, Kiva lists the loans,
collects the contributions from Kiva users, and sends the money to the
MFIs. When the MFIs collect money, they send the payments (again, in
batches) to Kiva, which distributes the payments to the loan contributors.
The MFIs often fund the loans before telling Kiva about them (to avoid the
delays in the funding process and get the money to the applicant quickly),
and then backfill the accounting once the loan is actually funded. In
some cases, a loan will expire on Kiva without being fully funded; when
that happens, any contributors will have their contributions refunded, and
if the MFI already disbursed the loan, they will have to find another
source of funding for it.
§ Loan repayment
When payments are received on a loan, the money is made available to
contributors as “Kiva Credits”. If you have Kiva credits, you can apply
them to a different loan, donate them to Kiva itself, or transfer them
into a PayPal account.
§ Defaults
Because most loans are made in developing areas of the world, if someone
defaults on their loan, there is often no workable legal recourse for
requiring repayment and the people who contributed to the loan are not
repaid. The MFIs do research on the applicants before granting loans, and
do a generally good job of selecting people who will repay their loans.
Kiva has an overall default rate of about 2%. (For comparison, in 2004,
the federal Small Business Administration, which makes loans to small
businesses in the US, had a 2.4% default rate, which has
hit 11.9% with the recession.)
This does mean that any loan made through Kiva carries the risk of losing
the money contributed.
§ Interest
Kiva does not collect any interest on its loans. Consequently, Kiva users
will only get back exactly what they put into the loan in the first place,
unless the loan defaults. This means that anyone contributing to Kiva
loans over a long term can expect to lose some money to defaults. Because
Kiva is operated as a non-profit organization with the goal of alleviating
poverty, they don’t feel it is appropriate to add interest payments to the
loans they fund.
The MFIs that Kiva partners with do charge interest, however. The
interest that they charge pays for their staff and administration costs.
Typically, they charge a small percentage of the loan in interest, plus a
flat fee to cover the effort necessary for any loan, regardless of its
size. This includes things like interviewing applicants and researching
their financial history and dependability. Because the loan amounts are
small, that fee often adds a noticeable percentage to the loan, leading to
interest rates that seem surprisingly high. The average interest rate on
Kiva is about 35%, but I’ve seen rates as high as 50%.
The MFI interest rates are another reason that Kiva doesn’t charge
interest themselves; they don’t want to add any more to the borrower’s
repayment load.
For each of its partners, Kiva shows both the average interest rate for
that MFI and the median interest rate for other MFIs in the same region.
People worried about the high rates are encouraged to check up on the MFI
before committing to a loan.
§ Kiva’s Funding
Since Kiva doesn’t collect interest and they apply all of a contributor’s
money to the loans themselves, they rely on donations to keep running.
After you contribute to a loan, they ask for a donation and suggest an
amount equal to 15% of your loan contribution. You have the option of
choosing a different percentage (including 0%) or specifying a particular
dollar amount. You can also give the repayments on your loans to Kiva as
a donation, either manually (by donating your Kiva credits) or
automatically (by specifying that all repayments should be automatically
donated).
Kiva is a 501(c)3 nonprofit, so all donations are tax-deductible, although
loans are not. (As mentioned above, loans are not even guaranteed to
maintain value.)
§ Criticism
I feel it would be unfair to talk about Kiva without acknowledging that
some people have criticisms of the microlending process.
The most common criticism about microlending in general is the high
interest rates. Kiva does as well as it can in this area, recognizing
that MFIs need to charge enough to fund their activities, but also being
as transparent as possible about what is being charged. Kiva also
periodically reviews their partners’ claims and practices. (They have
closed relations with at least one partner because of fraud—not
interest related, in this case; the partner was claiming much higher
amounts on its loans than it was actually disbursing.)
Conversely, some people argue that Kiva should themselves be charging
interest. I can’t find the article now, but I read a piece a while back
that argued that when microfinance funding organizations like Kiva pay
interest, contributors change from a “charity” mindset to an “investment”
mindset and end up putting more money into system. Personally, I think
that the charity mindset is a better fit here. If the goal is to
alleviate poverty, then helping people establish businesses with as few
impediments (including additional interest) as possible is a better
approach than one that is beholden to the best return on investments.
There are also claims that microlending doesn’t help all that much. There
was an article in the Boston Globe a few months ago titled “Small
change: Billions of dollars and a Nobel Prize
later, it looks like ‘microlending’ doesn’t actually do much to fight
poverty”. Despite the inflammatory subtitle, the article is reasonably
balanced. It refers to two unpublished papers about studies that
concluded that microlending is not as effective as many people think. For
one thing, I’d want to wait until the papers are published; peer review is
likely to shake out any methodological problems in the studies. But the
article points out that the studies found that microlending did make a
difference for a lot of businesses and helped them either establish
themselves or grow. It’s not a panacea—if for no other reason than that
the eligibility requirements for “who can take out a loan and be counted
on to repay it if there’s little government enforcement to rely on” mean
that only a small part of the population will be considered in the first
place—but it is a step in the direction of helping establish functioning
local economies in poor regions. The article provides a number of
pro-microfinance perspectives, most of which boil down to, “The studies
show that microlending isn’t magic, but it’s a useful tool—as long as you
understand that it isn’t magic.”
Kiva in particular was the target of some criticism recently when they
began offering loans to entrepreneurs in the US. Many people felt that
people in the US are either well-served by the standard banking system or
have access to many government programs and would not get much additional
benefit from a microloan. I tend to regard this as a place where it’s
best to give people the ability to make their own decisions. Kiva felt
that there was benefit to offering loans in the US, and those who agree
with them can now participate in those loans. Those who disagree have no
obligation to fund US loans, and there are plenty of available loans in
poorer countries. (There was a time when Kiva funded every loan it
offered and sometimes ran out of new loans to fund. These days, there’s
more demand, and loans do periodically expire unfunded.)
§ Conclusion
I think that Kiva provides an important service to developing areas of the
world, and I put a portion of my charitable giving into the site each
month. Personally, I don’t plan to take money out of it; what I put in
goes either towards funding more loans or donations to keep Kiva running.
Other people have different financial approaches, of course.
Kiva also isn’t the only place I donate. In addition to local giving, I
also contribute to more traditional aid organizations, because
microlending is only effective if people are already healthy, educated,
and empowered. For giving along more traditional lines, I recommend
Heifer International, which mostly focuses on
sustainable agriculture in developing regions.
§ Competition
Kiva was the first peer-to-peer microlending website, but many others have
followed in its footsteps, and some of its competitors take different
approaches to microlending. If you don’t like Kiva, there might be
another organization that’s a better fit for you.
- The Microfinance Gateway is a large database of
microfinance organizations, including aggregators like Kiva. It
contains links to many more organizations than I’m going to link to
here.
United Prosperity doesn’t directly give
contributed money to borrowers; it uses that money as collateral for
traditional bank loans. They feel that this approach is better at
integrating people into the traditional banking system.
- The Rotarian Action Group for Microcredit works to assist
Rotary groups with setting up their own microlending operations.
MicroPlace collects interest on its microloans, so
contributors earn a return on their contributions.
- Prosper is a more general peer-to-peer lending broker.
Contributors can use it either as a general investment fund or a broker
for choosing individual loans to fund. Anyone with a decent credit
score can request a loan, which is bid on by lenders.
§ My Kiva History
If you want, you can look at my lender page on Kiva. So
far, I’ve contributed to 11 loans:
- Ibrahim (last name withheld for privacy) in Lebanon:
Owns a sewing factory. Currently 58% repaid on a $3,000 loan.
- Neang Soknoeun in Cambodia: Weaves and sells groceries.
Currently 33% repaid on a $700 loan.
- Khosiyat Kuldasheva in Tajikistan: Sells foodstuffs at
a local market. Currently 37% repaid on a $3,000 loan.
- Harriet Namugabo’s group in Uganda: A 5-person group
who are collectively responsible for the loan. The leader sells
medicines. Currently 66% repaid on a $875 loan.
- Lilane (last name withheld for privacy) in Lebanon: Owns
a clothing store. Currently 24% repaid on a $1,000 loan.
- Emélido Oporta Alvarado in Costa Rica: Raises cattle.
Currently 0% repaid on a $1,175 loan. (His payment schedule is one
payment every six months. The first one is due next April.)
- Efrain (last name withheld for privacy) in Peru: Grows
and sells potatoes and raises cattle. Currently 0% repaid on a $1,200
loan. (He doesn’t have a monthly payment schedule; the entirety of the
loan is due next March.)
- Felix Alberto Tórrez Machado in Nicaragua: Runs a
cybercafe. Currently 13% repaid on a $975 loan.
- Anonymous in Iraq: Runs an auto repair shop. Currently 0%
repaid on a $3,000 loan. (First payment is due in January. Kiva also
notes that government regulations on foreign loans are murky and they
might not be able to receive the money from the borrower’s payments. I
figured it was good to support a business in Iraq, though, so I
accepted the risk.)
- Nuevo Amanecer Group in Bolivia: a 13-person group who
would be collectively responsible for the loan, with various jobs.
Loan expired before being fully funded and my contribution was
refunded.
- Gaibullodjon Sobitov in Tajikistan: Processes and
sells dried apricots. Currently 70% raised on a $1,500 loan, with 2
days before the loan expires.