The Kiva Fairytale
nextbillion.net
nextbillion.net
In one quote is says "With interest rates often exceeding 100 percent," which I am pretty sure is completely false. I have made hundreds of loans and I worry about rates above 40%. I seek lower rates (often between 20-30%) and find them often. The article says Kiva doesn't discuss the rate - but it is shown on every lending page, as a lender you can select based on loan rate (I know, I do).
The article also doesn't provide data either on the failure of Kiva to help. Granted I think Kiva should provide more data on the impact of loans and whether it is helping or not - I like to believe it is but <a href="http://investing.curiouscatblog.net/2009/10/16/micro-credit-... do question how useful Kiva really is</a>.
I don't know about expenses for Kiva (though sites like Charity navigator rate it highly). But as a lender on Kiva it really doesn't matter. Kiva expenses are paid by donation. To lend using Kiva you can make donations but you don't have to. High expenses matter it seems to me if you are choosing who to donate to.
Kiva does take advantage of human psychology in a smart way it seems to me, connecting lenders to people that need loans. It is a bit of a fiction as the article points out but it is also real - your re-payments are based on that loan. I see the benefits of that human connection as worthwhile (people like that human connection - showing their photos adds to that) though agree if you want to find fault it is something you can question.
I like another site that provides charity to local groups directly http://www.globalgiving.org/ I do figure there is more chance of fraud given the nature of having lots of little organizations that it is hard to monitor. But I like getting directly to small groups that are making an effort and being able to target what you like.
Some sites that have published research on micro lending
http://microfinanceresearch.org/
http://www.microfinancegateway.org/p/site/m/
http://www.cgap.org/Kiva’s initial attraction was that it was a peer-to-peer lender, but it is not in fact a peer-to-peer at all. The loans featured on the website were made months before, and Kiva users are essentially buying them from the banks. But the deception does not end here. Kiva cleverly chooses to reveal out-of date portfolio yields instead of actual interest rates on loans, conveniently and consistently under-estimating the real cost to the poor.
It is true the yields are quoted as portfolio yields (average for the lender overall). This seems adequate to me. If the yields are not representative (out of date, etc.) that is bad and Kiva should fix. I didn't notice evidence that this was a widespread problem. Kiva also lumps in all costs to the lender so it isn't like many financial institutions in the USA trying to fake low interest rates with lots of hidden fees etc. (though regulation has made it more difficult for financial institution to make loan rates deceitful - not that they don't try but it is much harder than 15 years ago).
It is peer-to-peer at the essence I think, though it is often not directly that way and I don't think Kiva hides how it works at all. Though I do agree it is easy for someone to not make one or two extra clicks to read a bit about Kiva before making a loan but I think Kiva's balance is fine. Kiva also has a new thing called Kiva Zip that is more "pure" peer-to-peer for people that want that.
I have given to another organization that just made grants (instead of loans) for over 10 years now. Trickleup.org It doesn't have the neat peer-tp-peer psychology going for it. And it is straight charity, not a loan. I have also wished trickleup.org did (or arranged for professors to do) studies on the impact. They have done a bit more in the last few years on the research piece.
I would like more study of Kiva. I want to understand if it is helping and what factors matter. I steer toward lower loan rates but does that really make sense (I figure too high a rate increases risk for the person). I try to lend to purchases of equipment that will increase productivity (though I can't always find those loans) - is that really effective? I also like loans to buy things to rent out devices to increase productivity (some people buy washing machines and lend them out...).
I am very lucky. I like to help give others a chance to gain economic success in the very limited ways I can afford to. I hope Kiva helps, but I do question if it does. And I question if they are focused on growth so much (as most USA based organizations are) that they grow beyond what is helpful. It is possible there is a core that is now say 20% of the Kiva's loans that are hugely beneficial. 50% that are sometimes great, sometimes bad... the value is questionable overall... And say 30% that are likely to just make things worse. But those figures could be anything (from what I know - I don't have any data).
Given what I know I think it is worth lending some money through Kiva. If I were one of those huge foundations giving Kiva millions I would spend at least 20% on research until there was good data on how successful it is and what are the keys for making it work.
http://blog.microfinancetransparency.com/whats-wrong-with-ki...
If you want to see an MFI with rates approaching 100%, look at Mexico in particular. Before the MFI quit Kiva, Brac in South Sudan had a portfolio yield of 88%:
http://www.microfinancetransparency.com/evidence/PDF/11.24a%...
This MFI quit Kiva, but you can see it here: http://www.kiva.org/partners/107 note that Kiva now states the portfolio yield is "only" 69.03%, but you can't lend through them anymore as they are one of the many MFIs that have quit Kiva.
Portfolio yields do not include the impact of forced savings, some fees etc. and can be manipulated, and for a discussiong on why these are absolutely critical in understanding how much a loan costs, see the excellent website www.mftransparency.org, an NGO dedicated entirely to revealing the actual interest rates charged by microfinance banks, many of which exceeed 100% (but are not all Kiva partners). It is not possible to generalise about the ratio between the portfolio yield and the actual interest rates, but as a rule of thumb, a yield over 50% is likely a little too close to an actual interest rate of 100% for me, but this is a very broad rule of thumb that I use if I can't get more accurate data.
But it is good that you look at this, albeit flawed statistic, and try to only make reasonably priced loans. If everyone does this then the MFIs offering lower rates will receive more funding, encouraging those charging high rates to reduce them. Competition basically.
Please do not think this is a trivial detail. As the post above demonstrates, this can make a big difference in the overall cost of the loan that the poor person actually pays, so if you are trying to avoid exploitative interest rates you really must consider this.
But, the more interesting question that is harder to answer, and has far reaching implications, is why Kiva does not publish these rates. See the comments on the Next Billion article. Is Kiva unable, or unwilling to do so? They manage to get all sorts of other information - why not the interest rate? How hard can it be? The bank presumably knows this crucial piece of data, and yet this is replaced with a knowingly flawed portfolio yield statistic. Why?
I do agree with the article that reporting rates for that loan would be better than some average. If I were in charge that is what I would try to do. Given that I am not, I am willing to accept average - though I wish we didn't have to. I do not think we should accept wrong data though.
There claims about Kiva under-reporting the rate are worthy of response from Kiva in my opinion, but the claims don't seem to be proved to me. It is possible, in fact it should be the case, that Kiva loans from a lender are less than the average portfolio of the lender. Part of the idea of Kiva is to provide interest free (to the "BANK") capital. The Kiva partner "banks"/financial charities... still have other costs of servicing the loan that have to be covered with interest but they don't have to add to that the cost of capital for Kiva loans. That is my understanding about the concept anyway.
If I understand the post correctly they are taking a 2nd organizations estimation of loan costs to borrowers from lenders. And showing those are higher than Kiva reports. But part of the idea with Kiva is that the lenders can loan for less because they are getting free capital (with other capital they may well have to pay interest) so it could be perfectly accurate that Kiva's rates are what Kiva borrowers pay and those other rates are what averages for the whole portfolio of the lender without. In which case it doesn't mean Kiva's rates are wrong.
If Kiva is not managing the financial data well enough to accurately report those figures that is bad. I don't see enough evidence from that post to say they are - though as I said, I would hope Kiva addressed (or will address that claim).
While I am mainly defending Kiva here (because my opinion is that it is mainly good, though could be more transparent) I think it is good that people challenge Kiva. And I wish Kiva was more transparent.
To get good data likely costs money - Kiva has to hire people to assure the accounting is accurate, train people, etc. Given the challenges it may well be hard to do it all at once. If I ran Kiva I would do so with a set of long time parters now. I would indicate that they have this higher level (more accurate and more current) portfolio yield. I would make sure we had good ideas on how to do this from working with a set of partners. Then I would deploy the new improvements to more partners.
People sometimes forget Kiva is doing some pretty amazing stuff. Many of these partners barely have internet connections, they don't have CPAs working for them, they have some very well intentioned people. I do also believe there are probably scams going on. Kiva has quite a challenge to keep that all under control.
But, perhaps we might not agree on this, but I am deeply worried about the use of the portfolio yield rather than stating an actual interest rates. In part this is because I think the poor are paying more than we are being told. Also I find this poor transparency, and Kivans are offering their money interest free, the least Kiva could do is be open with them. Other lending platforms are perfectly willing and able to do this. I also find this a worrying sign regarding Kiva's ability to control and monitor what is going on - if they can't even report an interest rate how good are the internal controls. They have had a number of "problems" with rogue banks - this doesn't surprise me given what I see of their controls. But most interestingly perhaps, this is perhaps a function of a flawed business model. It is not that I think Kiva CHOOSE not to publish these rates. I believe they simply CANNOT, and that is more worrying.
Kiva is, in some regards, similar to a retail bank (this is an analogy, not literal). It takes money from some people and lends it to others. Obviously there are major differences, but in essence these are the two key transactions - get money from A (you), lend to B (poor person) via agents (banks). It intermediates. And yet it doesn't know the interest rate in what is meant to be a P2P model? It can get you the photo and the story and some of the loan details like amount and number of months. Isn't this a little strange?
However, broadly I think we agree here - this is ultimately about transparency and reporting obligations, we disagree on the severity of the problem. But I would urge you to look into this further.
Another interesting comment is that you suggest change you personally would make - improved reporting, greater transparency, improved control, more accurate portfolio yield (by which you are referring to some proxy for interest rate) etc., good points. What is interesting is that there are other institutions already out there that have managed to overcome these problems, albeit to varying extents, and thus demonstrated that these are not deal-breakers, but relatively simple hurdles. Kiva has substantial funding and is heavily subsidized by volunteers, and yet can achieve none of this. And don't forget, it is not even as complicated as a bank. The most expensive stage of the chain is not collecting money from US citizens via PayPal and a website, nor sending money over to the banks in other countries, but doing the actual loans to the poor people in the field, and Kiva doesn't do this final stage, so has no actual costs of due diligence of clients, visiting their businesses, completing the forms, paying the loan officers, collecting repayment and dealing with non-repaying clients. It is only dealing with the relatively simpler and less onerous parts of the chain of money from your pocket to the pocket of the end client, and yet cannot even do this well.
I couldn't understand how they showed "portfolio yield" was less than costs to borrowers. "Portfolio yield" as Kiva uses it is intended to include all costs to borrowers.
> They have had a number of "problems" with rogue banks
I agree, but I expected this. Look the banks in the USA and Europe have been shown to be incredibly corrupt all the way to the top. That is a huge moral failure we seem to not care about - those same people continue to buy our politicians with no significant push back. I only say this to set that stage that while some of Kiva's partners have issues none of them even approach systemic failure of the large USA and European banks actions have been doing continually for a decade or more.
These tiny "banks" Kiva is dealing with have some issues. There isn't an infrastructure of financial auditing and regulation. There isn't a large number of qualified accounting experts. So these "banks" and some are more charities than "banks" are trying to do this stuff but there are likely to be issues.
How you judge how Kiva does in rooting out fraud and ineptness by banks is partially going to be based on your expectations. I expect fraud and ineptness to be part of what the first few years of Kiva would include. I might be getting to the point where i think Kiva should have improved more by now.
I think Kiva is too focused on growth and not enough focused on making sure the dollars at work are producing the most value (and avoiding causing harm). This is a a typical problem the USA mentality that growth is nearly everything (look at the silly frustration with Apple for only making $13 billion a quarter because growth is slowing down as a very visible example).
The challenges to expand those reached with beneficial micro-loans are much greater than I think many want to admit. I expected Kiva to have a bunch of work to make that happen (and in doing so for their to be substantial issues).
I agree it is good there are a bunch of options to Kiva.
I am not at all sure "It is only dealing with the relatively simpler and less onerous parts of the chain of money from your pocket to the pocket of the end client, and yet cannot even do this well." is accurate. I think they do that very well.
I trust charity navigators ranking much more than one blog post that says expenses are high without any details. My guess is the expenses may appear high for very good reasons. And as I stated those costs matter not to borrower or lenders (only donors - donors bare the full cost of Kiva expenses not lenders or borrowers on Kiva). It wouldn't be amazing if Kiva got greedy given all the money flowing to them. I am not saying they did, but I wouldn't be shocked if expenses have increased because they got enough donations that they could (people often take what they can even in charities - not necessarily greedly just justify it because there is a big pool of money...). I looked closely years ago and found Kiva good on this front. I haven't looked now but shifted my donations to Trickleup.org and through GlobalGiving.org the last few years so haven't had to look.
The part I question with Kiva is oversight on the hard part. Kiva sends lots of people (many volunteers but Kiva has costs paying I think for expenses) to the field to audit and train these partners. And I believe (though could be wrong) they do lots of auditing at the headquarters level.
My concerns with Kiva I are basically related to the hard part you mention:
1) measurements of success in improving people's lives (you didn't mention that as a hard part, but I think it is)
2) are they auditing these partners well
a) is all the loan data accurate, are payments credited properly, are loans going where they say they are...
b) is Kiva able to block fraud
c) since I figure for at least some partners they are going to be issues is Kiva able to provide good training and resources to help where necessary (and verify it is working)
d) is the data provided to Kiva lenders accurate (costs to borrowers, those borrowers are actually getting the money...)
Also, as I mentioned in at least one comment - Kiva Zip (new in the last year) is (I think) basically direct peer-to-peer for those that want that.
More detail than you probably want to know: http://www.givewell.org/international/top-charities/give-dir...
1) Kiva spends to much money on marketing and is therefor inefficient. 2) Kiva gets to much media attention. 3) Kiva are attracting more than their share of micro-investors. 4) Kiva does not export Western cultural values.
Regarding number 4, I think individual investors should decided what and what not to fund. I find cock/dog-fighting to be inhumane, but I enjoy hunting, many people would say hunting is inhumane and immoral and a smaller group would go as far to say "eating meat is murder". What about businesses using malnourished horses to transport goods? Should Kiva not fund anything animal related?
As far as only funding legal organizations. I am sure Kiva does not fund narcotic production or gun running. But how can they possibly be sure all businesses they fund are 100% legal, complying with all health, zoning, retail, licensing etc. laws of the local county/state/country?
In the end I'm happy I didn't advertise Kiva to friends and family. I'd have to be 100% sure about the results of any such organisation before recommending it to other people and I guess in the case of Kiva, I never was.
But I think you touch on a CRUCIAL point - it helps our conscience. Phil Mader's original post, which I reference, is well worth reading:
http://governancexborders.com/2013/12/10/kivanomics-101-or-d...
It is a short piece and eye-opening. I cite a phrase from this article in my piece:
Kiva enables us "to consume the feeling of charity without financial loss"
To say that Kiva simply "just doesn't work" is tricky, because we have to define "work". It depends what the objective is. If the idea is to make people feel that they have done something useful with their $25, which they get back a few months later, it works wonderfully. If the idea is to efficiently transfer spare capital in "rich" countries to "poor" countries (forgive the simplification of terms), it doesn't work very well, as there are far more efficient mechanisms. If it is to provide low-cost funding to entrepreneurs, then it has pretty mixed results which are hard to verify as Kiva (mysteriously) don't publish the actual interest rates. In some cases you can find them out though.
In summary, you are very wise to suggest that an endorsement requires you to be convinved that this is a good business. It appears Kiva did not meet your standards, and I am inclined to agree with you.
This is a poison on humanity.
http://governancexborders.com/2013/12/10/kivanomics-101-or-d...
The actual quote is that Kiva allows us "to consume the feeling of charity without financial loss"
You might also appreciate the work of Domen Bajde referenced in Mader's article.
I point this out not to be a jerk. Certainly, these are worthwhile causes in themselves, but there is no lack of traditional charitable giving opportunities elsewhere. I suspect Kiva knows this and is really selling the more differentiated and compelling idea of helping people to stand on their own, as the article mentions.
To be fair, most of their loans are still around enterprise, but I cannot help but wonder if loan requests for such needs reveal that the very idea behind Kiva is unrealistic to some extent. That is, when you have people who don't have homes or basic subsistence wherewithal, is it realistic that they can launch or run a successful business? Is it also realistic to expect that a significant portion of their loans won't end up redirected to other needs? This concern is not helped by the fact that the only updates I've ever received are regarding loan repayment, and not how the recipient is actually faring. It's also not encouraging when I see people requesting loans to pay off other loans. [3]
Recent articles posted on HN have shown that just giving money to poor people with no pretense or payback requirement is surprisingly effective. Maybe Kiva is selling a dream that has greater marketing appeal, but less actual effectiveness.
[1] http://www.kiva.org/lend/667533
I agree with you about the attractiveness of direct cash. One thing to remember is microfinance has been around a long time. My guess is there is more evidence of effective microfinance than of direct payment. That is not to say direct payment isn't as effective but just to remind people while I think microfinance should have more evidence for effectiveness there has been some good research.
Based on the initial success it has grown a ton. And conditions change (including the large amounts of money being thrown into micro-finance). Studying how effective it is today, how effective specific orgs are (Kiva, but also specific banks Kiva works with) and specific methods and factors (how much does interest rate matter, does purpose the funds will be put to matter...) is important.
I think the rush to increase funding to microfinance has probably been good. You can suffer real costs to people by moving to slow and needing too much research. But I do think today, there should be more research going on (in a lean startup kind of way - what is successful, mini-experiments...).
This is actually a not-uncommon catch with regards to micro-credit in general, both in the US and abroad.
At one point I worked for a micro finance institution, having been very impressed with the concept (applied generally) and the goals of the company.
What I realized shortly after joining was that the overwhelming majority of loans issued were for "life expenses" - which often translates to "buying stuff", although this is of course not always the case.
Ultimately, then, micro-credit in this context is really just lending targeted at an under-served demographic with not-quite-awful interest rates. Certainly not evil by any stretch (and on the whole, a net-positive) - but not living up to the very serene ideals of more Grameen-purist micro finance.
>micro-credit in this context is really just lending targeted at an under-served demographic
I think we have to be careful when providing loans to impoverished people as a means of helping them with subsistence-level stuff. Seems that it is very likely to leave them worse off, especially when interest is involved. Going forward, they now have largely the same income and expenses, yet also a debt to service.
Reminds me of payday loan places here in the U.S. And, it seems difficult to imagine that those who would saddle impoverished people with interest-bearing debt so they can meet basic needs aren't knowingly preying upon their plight.
But, I have no experience working in the field. I'd be interested in hearing success stories or other scenarios to the contrary that you may have witnessed.
If the borrower expects to have monthly expenses which are greater than their monthly income, and therefore nothing left over to make regular repayments of interest and capital as they become due, then the lender has no business making the loan in the first place.
I'm not familiar with payday lenders in the US, but responsible ones in the UK will steer customers to an installment-based product if it turns out they've needed to roll the loan over to the next month, more than a couple of times.
>responsible ones in the UK will steer customers to an installment-based product if it turns out they've needed to roll the loan over to the next month, more than a couple of times.
Installment-based products are still debt, right? In fact, I would imagine that to be what's primarily sold to impoverished people who have little-to-no assets. Still, it's no-good when we're talking about debt for subsistence. My view is that it's better to simply give them the money. If the person could not afford to eat without help, what will change to make it so when he now also has an additional expense (debt)?
That's correct. However, as my original comment states, assessing ability to pay is part of underwriting. For an installment loan, this means checking (at least) that someone's monthly/weekly income is higher than their monthly/weekly regular expenses.
The first loan I took was to buy a reliable car (for my journey to/from work). I could not afford to buy that car in cash, but could afford to pay it off within a couple of years, as my income was higher than my regular expenses, and I could use the difference to pay for the car.
it's no-good when we're talking about debt for subsistence
I agree. It's good mainly for revenue-generating assets (e.g. expanded inventory for your small shop) or cost-saving assets (e.g. a car which doesn't need frequent costly repairs).
Precisely.
- Marketing expense : I joined Kiva because they said they will make the first contribution on behalf of me. I chose the borrower and Kiva sent the money. I didn't spend anything. I'm sure this would come in as marketing expense. This was one of their largest marketing campaign.
Kiva's Response: http://www.nextbillion.net/blogpost.aspx?blogid=3731