October 2, 2009
Kiva Is Not Quite What It Seems
By David Roodman Tags: Kiva, stories
[Update: Matt Flannery, CEO and Co-Founder of Kiva, replied to this post as a guest blogger. Kiva has also changed its site, and I have blogged more.]
This post is so long it needs an:
Executive Summary/Long Story Short
Kiva is the path-breaking, fast-growing person-to-person microlending site. It works this way: Kiva posts pictures and stories of people needing loans. You give your money to Kiva. Kiva sends it to a microlender. The lender makes the loan to a person you choose. He or she ordinarily repays. You get your money back with no interest. It’s like eBay for microcredit.
You knew that, right? Well guess what: you’re wrong, and so is Kiva’s diagram. Less that 5% of Kiva loans are disbursed after they are listed and funded on Kiva’s site. Just today, for example, Kiva listed a loan for Phong Mut in Cambodia and at this writing only $25 of the needed $800 has been raised. But you needn’t worry about whether Phong Mut will get the loan because it was disbursed last month. And if she defaults, you might not hear about it: the intermediating microlender MAXIMA might cover for her in order to keep its Kiva-listed repayment rate high.
In short, the person-to-person donor-to-borrower connections created by Kiva are partly fictional. I suspect that most Kiva users do not realize this. Yet Kiva prides itself on transparency.
I hasten to temper this criticism. What Kiva does behind the scenes is what it should do. Imagine if Kiva actually worked the way people think it does. Phong Mut approaches a MAXIMA loan officer and clears all the approval hurdles, making the case that she has a good plan for the loan, has good references, etc. The MAXIMA officer says, “I think you deserve a loan, and MAXIMA has the capital to make it. But instead of giving you one, I’m going to take your picture, write down your story, get it translated and posted on an American web site, and then we’ll see over the next month whether the Americans think you should get a loan. Check back with me from time to time.” That would be inefficient, which is to say, immorally wasteful of charitable dollars. And it would be demeaning for Phong Mut. So instead MAXIMA took her picture and story, gave her the loan, and then uploaded the information to Kiva. MAXIMA will lend the money it gets from Kiva to someone else, who may never appear on kiva.org.
Moreover, the way Kiva actually works is hidden in plain sight. On the right of Phong Mut’s page, you can that MAXIMA lent her the money on September 8 and listed her on Kiva on September 21. So while Kiva is feeding a misunderstanding, it isn’t technically hiding anything.
And finally in Kiva’s defense, its behavior is emblematic of fund-raising in microfinance and charity generally, and is ultimately traceable to human foibles. People donate in part because it makes them feel good. Giving the beneficiary a face and constructing a story for her in which the donor helps write the next chapter opens purses.
Our sensitivity to stories and faces distorts how we give, thus what charities do and how they sell themselves. What if the best way to help in some places is to support communities rather than individuals? To make roads rather than make loans? To contribute to a disaster preparedness fund rather than just respond to the latest earthquake? And how far should nonprofits go in misrepresenting what they do in order to fund it? It is not an easy question: what if honesty reduces funding?
The big lesson is that the charities we observe, the ones whose pitches reach our retinas, are survivors of a Darwinian selection process driven by our own minds. An actual eBay venture called MicroPlace competes with Kiva; but MicroPlace is more up-front about the real deal. Its page for sample borrower Filadelfo Sotelo invites you to “invest in the organization that helped Filadelfo Sotelo: Fondo de Desarrollo Local” (FDL). This honesty is probably one reason MicroPlace has badly lagged Kiva. Who wants to click on the FDL icon when you can click on a human face?
Nicholas Kristof once tweeted that he “Just made a new microloan on www.kiva.org to a Nicaraguan woman. Great therapy: always makes me feel good.” We should not feel guilty about the pleasure of giving. It should not just be eating your brussels sprouts. Indeed, Kristof might argue that Kiva.org’s ability to make the user feel good is its greatest strength, for it draws people into an experience that stretches their horizons, educates them about global poverty, and entices them to contribute money they might otherwise spend on potato chips.
Still, we should take responsibility for how our pursuit of that pleasure plays out. Surely it is better to invest in an institution such as FDL without requiring it to incur the expense of posting pictures and stories of every borrower. Historically microcreditors have scaled to reach millions of people by cutting costs to the bone. Surely it would be better for us to give in a way that allows the microfinance institutions to put more of their limited energies into helping poor people manage their difficult lot and less into making us feel good.
I do not know the full answer to this conundrum, this tension between the need to draw donors and operate efficiently. Still, subtle dissembling makes me uneasy, perhaps because good intentions so often go awry. If a charity obscures how it operates, should we trust its claims about its impacts?
Long version
My wife Mai heard someone say that the world needs both playwrights and critics—if more playwrights. I treasure this observation because, as this blog must make obvious, I’m a critic. I can testify that being a critic can be bruising, especially when the playwrights you critique are alive. It’s solace to think that the world needs me.
But the observation also helps me appreciate playwrights. They are the people who create things that weren’t there, the people who are a tad insane in the sense that they confuse fantasy and reality. They see something in their mind’s eye and believe they can make it real. Precisely because I am not like them, I hold playwrights—visionaries—in some awe. The most skillful, passionate, and lucky of them “put a dent in the universe” as Steve Jobs said. (An early employee described Jobs’s uncanny ability to create a reality distortion field that altered bystanders’ perceptions of the technologically possible.) Without playwrights, we might be still living in caves. At least, we wouldn’t have iPhones.
We also probably wouldn’t have the Grameen Bank, BRAC, and dozens of other successful microfinance institutions (MFIs) founded by driven visionaries. And we wouldn’t have Kiva, the person-to-person microcredit web site founded by Matt Flannery and Jessica Jackley.
On the other hand, without critics—analysts driven to understand the world rather than change it—we might not have mastered electricity. So we needed them too to get to iPhones. Critics and playwrights are yin and yang. Of course the two essences exist within all of us.
Critics seem to parse matters into quantities and concepts while playwrights seem to speak, and perhaps think, more in pictures and stories. (Or am I over-reaching here?)
The Kiva story
Like most innovations, Kiva is not entirely new. Rather, it is an ingenious fusion of older ideas. One is child sponsorship, which Save the Children pioneered in 1940. A family in a rich country sends $10 or $20 each month to a designated child in a poor country via a charity. In return, the family receives a photo and an update at least once a year. When I was perhaps eight, my family sponsored Constance, a Greek girl about my age, through Save the Children. I remember looking at her solemn face in two successive black and white portraits, trying to judge how much she had grown in a year.
Child sponsorship grew explosively in the United States in the 1990s, thanks mainly to groups with names like the Christian Children’s Fund, Children International, and Childreach (now Plan International). Then an exposé in the Chicago Tribune in March 1998 brought it crashing down (hat tip to Tim Ogden). Starting in 1995, editors and reporters at the paper sponsored a dozen children in such countries as Guatemala and Mali. Then the reporters tracked down the children:
The Tribune’s yearlong examination of four leading sponsorship organizations…found that several children sponsored…received few or no promised benefits. A few others received a hodgepodge of occasional handouts, such as toothpaste, soap and cooking pots. Some got clothing and shoes that frequently did not fit.
Sick children were sometimes given checkups and medicine, but not always.
One child, a 12-year-old Malian girl sponsored through Save the Children, died soon after being sponsored, although the charity continued to accept money on her behalf for nearly two years after her death. A subsequent investigation by Save the Children found that at least two dozen other sponsors had sent the charity money on behalf of dead children in Mali for varying periods of time, in two cases as long as five years.
There was more to the story. Clover and John Dixon of Bellingham, Washington, received faked New Year’s letters from a West African child who had died in a donkey cart accident. Sponsorship peddlers sent heart-string-tugging appeals for extra $25 contributions on birthdays, Christmas, Easter, and the purpose-built International Hug Day. Childreach ran a disastrous experiment in Ecuador with a novel intervention called “microcredit.” Local workers embezzled funds; in protest, borrowers burned loan documents.
Undoubtedly some hard-sell charlatanry was at work. But the problem was deeper than that: a tension between creating the psychological experience of connection that raised money and the realities of fighting poverty. Often the fairest and most effective way to help poor children is by building assets for the whole community such as schools, clinics, and wells. Often charities contract with locals to build these things. Often things go wrong because of corruption, bad luck, or arrogance among outsiders thinking they know what will work. In the best cases, charities learn from failure. All these factors break the connection between giving and benefit, sponsor and child. But admitting that would have threaten the funding base:
“For a segment of the public, there will be nothing else that will reach those people the way that child sponsorship does,” says Charles MacCormack, the president of Westport, Conn.-based Save the Children, the nation’s oldest and best-known sponsorship agency.
…
As MacCormack puts it, “An awful lot of people who sign on to a personal human being will not sign on to a well.”
…
“[The charities] are addicted to it, because if they stop, they lose their identity as Save the Children,” says Michael Maren, a veteran aid-agency worker in Africa and author of “The Road to Hell,” a book critical of private foreign assistance organizations including Save the Children.“That’s their thing,” Maren says. “They invented it. That’s their problem. The Catch-22 is that the only way to raise money is sponsorship, but that is not the way to development. The show is the biggest part of what they do. So, they say, let’s keep the show going, but try to find ways to make it better.”
Within a year of the Tribune series, the Missouri attorney general had slapped restrictions on Children International while the non-profit umbrella group InterAction committed to developing a set of voluntary industry standards. Many of the rule changes related to how clearly the charities disclosed how they operated.
Matt Flannery penned a history of Kiva’s first two years for MIT’s innovations journal in 2007. Two years later, he wrote a second installment in the same periodical. Flannery’s authentic, conversational voice makes both articles readable and engaging. As he tells his own story, he comes across as an approachable man of vision, passion, and action.
Flannery tells how another Kiva ingredient, microcredit, first mixed in his mind with child sponsorship. Fittingly, it happened through hearing a story:
One night, [Jessica] invited me to come hear a guest speaker on the topic of microfinance, Dr. Mohammed [sic] Yunus. Dr. Yunus spoke to a classroom of thirty people and shared his story of starting the Grameen Bank. It was my first exposure to the topic and I thought it was a great story from an inspiring person. For Jessica, it was more of a call to action that focused her life goals.
Some months later, Jessica went off to East Africa to perform “impact evaluations” for the Village Enterprise Fund, which works intensively with poor farmers, providing grants (not loans) and training to help them start business activities. Jessica’s work gathered data on indicators of poverty among participants, asking “questions like ‘Do you take sugar with your tea?’ and ‘Do you sleep on a mattress?’.” The couple kept in touch by phone. Then came the epiphany:
When the words “Sponsor a Business” entered our phone conversation, it set off a chain of ideas.We had both grown up sponsoring children in Africa through our church and families. Why not extend the core of that idea to business? However, instead of donations, we could focus on loans. This seemed like a dignified, intellectual, and equitable extension that appealed to us at this point in our lives. Instead of benefactor relationships, we could explore partnership relationships. Instead of poverty, we could focus on progress.
Soon after, Matt joined Jessica in Africa. He brought his video camera, which embodied the third key ingredient in Kiva, information technology. “I planned to spend most of my time making a short documentary of small business stories. I was also intent on investigating the viability of our new idea.”
Back in the United States Matt and Jessica began their impressive passage across the desert in pursuit of their vision. She networked for advice and support. He built the website after hours, and eventually quit his job. Together they wrote the business plan.
Once the site was ready, we needed loan applications in Africa to post on the site. That’s where our friend Moses came in. Moses Onyango is a pastor in Tororo, Uganda, whom Jessica had stayed with after I left. Moses is a community leader in Tororo and is highly connected to the Internet. We had been in close contact over the past year and Moses was ready to post and administer the loans of seven entrepreneurs in his community….
Once Moses had posted the seven businesses, the site was ready to go. We sent out an email to our wedding invite list and waited to see what would happen. We emailed about 300 people, and all seven businesses were funded in a weekend. That was April 2005, and we raised $3,500 in a few days. We were blown away; everything worked.
Right there, Kiva hit the tension in the sponsorship—more currently, “person-to-person” (P2P)—model: the need to find and post enough stories to keep up with demand. It led instantly to fraud, though Matt Flannery didn’t know it when he wrote the two-year history. As he recounts in the four-year history, a Kiva Fellow (volunteer) sent to Uganda discovered that Moses was producing many stories about individual borrowers the easy way, from whole cloth. Flannery flew to Uganda:
I spent two weeks organizing a clean-up operation. We hired accountants and lawyers. I spent hours with Moses, trying to figure out exactly what happened. He was very apologetic, but our conversations didn’t go anywhere. The money had vanished into a series of bad investments and a new house. Moses had a growing family. His new son was named for me: Matthew Flannery Onyango.
Admirably, Kiva went public with the information:
…we alerted our users that not all of their funds made it to the intended recipients….The reaction from our user base was telling. Overwhelmingly, they thanked us for our honesty and poured their refunds back into loans to other MFIs on the site. They reinforced an important lesson: whenever possible, be completely transparent. Transparency pays huge long-term dividends.
…
If you are running an organization and are considering withholding valuable information from your customers, just don’t. There are a million reasons to withhold information. Lawyers will warn you about liabilities. Marketing people will preach about tarnishing the brand. Investors will encourage you to look bigger and better than you are. Most of this is just tired and outdated thinking.Operating transparently is a great way to keep an organization accountable for its actions. Before you act, ask yourself: would you be OK doing this if you had to tell your entire user base about it? Would you be proud if your actions were described on the front page of the New York Times? These are great tests that I often use to vet a decision.
Flannery describes the “story factory.” Running one—collecting and posting stories—imposes a significant expense on MFIs but is evidently offset by the low 2% 0% (hat tip Ben Elberger) interest rate that Kiva charges on capital:
Out in Cambodia, I got to watch firsthand how a sophisticated MFI gets content on the site. It is quite an operation….
In the field, loan officers carry Kiva questionnaires along with a host of other loan documents. When they visit a village, they gather women and tell them about the opportunity to apply for a loan. If a woman decides to apply, the loan officer takes down information on paper—some for the Kiva site and some for other business purposes. The Kiva questionnaire asks for information that interests lenders. For instance, how many children do you have? And how will the loan make an impact on your family? This is all done in the local language—Khmer. They also take photos of the applicants.
Returning to the branch, the loan officer enters the data into a computer and sends the information—via Yahoo! Messenger—to the Kiva coordinators at the headquarters in a major city. Kiva coordinators are typically young, Internet-savvy males who get paid a few thousand dollars a year. It is a desirable job and about ten of them are now working in Phnom Penh. We train them in the art of synthesizing the Kiva questionnaire into a readable narrative; then they spend their days writing stories and uploading pictures.
…
As a kid, I would write letters to [sponsored] children a few years younger than me in Africa and South America. I imagined my letters being delivered to a thatched-roof hut halfway around the planet. It sparked my imagination and gave me a sense of connectedness. Through Kiva, we can provide some of that to a new generation of kids.Looking back now, I imagine that the transaction wasn’t as simple as I had thought. A lot of intermediaries were involved, lending a certain production quality to the experience. Plus, it was expensive. Delivering the child sponsorship experience was often as expensive as the child sponsorship itself. At Kiva, it’s not as simple as it seems, either…
The back-story
innovations invited to Sam Daley-Harris, who was central to teaching Americans about microfinance and serves on Kiva’s advisory board, to comment on Flannery’s four-year retrospective. While praising Kiva’s “profound contribution to the field of microfinance and international development,” he worried about the transaction costs, and noted one other concern:
…there is still a bit of deception in the notion that the moment that a loan is funded, the client in Kenya or Cambodia receives his or her microloan with those particular dollars. Indeed, there are real people receiving real loans to start or grow real enterprises, but if a client in a remote village qualifies for a loan, the MFI will not likely make that client wait for the Kiva lenders to put up that last $25. Said another way, loan funds are fungible, and a larger MFI on Kiva’s website will use Kiva’s loans as one important source of their lending pool, but it’s not actually those precise dollars going to that precise client.
As I noted at the top, Sam is right. In fact, I wrote a little program in Excel to extract data from kiva.org. It shows that for September 2009, only 4.3% of loans were disbursed after Kiva users had fully funded them through the site. And probably some of those the local lender had already committed to make before Kiva users had funded them. And in a new report on what happens to investors when microfinance institutions collapse, Daniel Rozas computed from data on kiva.org that the failure of just three lending institutions caused 93% of all Kiva defaults to date. No doubt many of those institutions’ borrowers were faithfully repaying at the time of collapse. Conversely, if a borrower defaults, the lender will often cover for him in order to maintain a good reputation on Kiva. So whether you get your money back as a Kiva user depends overwhelmingly on the solvency of the lenders, not the borrowers.
Kiva deserves kudos for being transparent enough for Rozas and myself to extract such data. But I wondered whether Kiva might become the Save the Children of P2P microcredit, the reasonably responsible pioneer who is imitated and overtaken by less scrupulous actors who pull the whole industry down a muddy slope into hucksterism. So I checked out MYC4, Wokai, and Babyloan (motto: “micro credits, great stories”; and no, it doesn’t make loans to babies: it’s French). To my surprise they were more more honest about the P2P relationships they (seem to) forge. Here’s Babyloan in enjoyably imperfect English:
Note: Babyloan works as a REfinancing platform and not as a direct financing system. It can happen that the MFI already “advanced” the microcredit to the entrepreneur when you make the online social micro loan. Indeed, as we are still in a launching phase and particularly for seasonal projects , we did not want to make the realisation of the project “dependant” on the Internet users’ good will and click. Babyloan is no microfinance reality show of ! However, we limit the funding time of the project not to create too much time discreprency between the projet and your micro loan, so your money is really used to finance the project. After the delay of 3 months maximum , we send all the money even if the funding has not been completed by the Internet users. The MFI will complete the funding.
So these sites are refinancing mechanisms. Kiva-linked microlenders make loans, then “sell” them to Kiva and its users. Might we rescue the P2P conception by observing that the lenders make their loans anticipating refinancing on Kiva? Yes, but only partly. Kiva limits itself to providing at most 30% of any lender’s capital. So a lender will make at least three loans for every one it chooses to post on Kiva (hat tip to Molly’s dad).
The end
Kiva brings microcredit and microchips to child sponsorship. Like sponsorship charities, it is all about stories: it was inspired by them and it succeeds by telling them. As a result, it operates in a pincers between the giver’s desire for personal connection and the costs and constraints that imposes on business of serving poor people. In fact Kiva can be seen as an ingenious finessing of this old tension. Technology has brought down the cost of transmitting stories and images.
Indeed, Kiva’s P2P connections are more solid than those of child sponsorship 15 years ago. The people in the pictures, we can assume, really do get microcredit. Following in the Tribune’s footsteps, Nicholas Kristof tracked down one of his borrowers, a Kabul baker, with little difficulty.
On the other hand, the P2P connection comes at a cost, is one-way, and is partly synthetic. The baker was surprised by the encounter because he had never heard of Kristof. For his part, Kristof might be surprised to learn that most of the Kiva loans he helped fund were disbursed before he saw them on Kiva. And the cost of collecting the baker’s story, translating it into English, taking his picture,and uploading it over a balky Internet connection may still be significant relative to the small loans and the great needs in Afghanistan.
Is it so terrible that Kiva modestly misleads in order to raise money for a cause about which it is passionate? No. But as a critic I offer these points:
- As I have discussed in connection with the interest rates on loans, the test of disclosure is whether people get the message. Technically, you see on Kiva’s site that most loans are disbursed before they are funded. But the How Kiva Works page creates the opposite impression, and my casual survey of Kiva users reveals widespread misunderstanding. In the wake of the Tribune scandal, sponsorship organizations adopted standards on disclosure, among other things, in order to “preserve and protect the trust of sponsors and other donors by ensuring the accuracy and transparency of each [child sponsorhip organization]’s approach to child sponsorship and the manner in which its sponsorship funds are used.” In this respect, Kiva is violating its stated ideal of transparency and ignoring a lesson from its family history.
- Kiva may fear that complete honesty would undermine growth. If so, they might be right. But I am optimistic that Kiva will make and survive the leap of faith in its users. So take this interesting, small hypocrisy as the camel’s nose under the tent, a way into the larger theme of how our behavior as donors rewards charities for distorting and contorting themselves. Why has Kiva succeeded by doing microfinance as opposed to community-level projects such as well and school construction? Such construction would stray from the P2P construct. Why has it succeeded by doing just credit despite the longstanding idea that services such as savings are at least as valuable and less dangerous? Because only well-regulated institutions should hold other people’s money; building them is hard and is neither photogenic nor atomizable into P2P.
- And why has Kiva, like most other microcredit fundraisers, succeeded while mythologizing the power of microcredit? You already know: storytelling works. Indeed, the most misleading thing about kiva.org is not obfuscation about sequencing that this post has dwelled upon but the smooth telling of the simplistic story about microcredit. In this Kiva is not unusual. The borrowers are all “entrepreneurs” even though we know the poor often use loans to pay for food or school. Meanwhile, as I have been discovering over the last year, the evidence on the effects of microcredit on poverty and empowerment is rather ambiguous. “Kiva lets you lend to a specific entrepreneur, empowering them to lift themselves out of poverty.” What part of that home page slogan is grounded in reality?
- Carol Adelman, among others, has argued that private philanthropy is superior to government aid in many respects because it is more flexible and subject to a market test. But we see here that we all, as private philanthropists, have our irrationalities too. Private aid therefore cannot perfectly substitute for public aid. No doubt it is best to do some of each, while striving to improve both.
October 3, 2009 at 12:54 am
David, thanks for investing the time and personal capital to write this. It’s not an easy thing to be a critic of well-meaning people trying to do good things.
But I firmly believe that the longer we gently mislead the public about both microfinance and philanthropy, the more painful the hangover will ultimately be.
Tim
October 3, 2009 at 10:47 pm
Thanks for such an important, balanced investigation.
October 4, 2009 at 12:15 am
Good critique. As a Kiva Friend, I don’t think you said anything that I didn’t already know. I followed a few of the links given (some, like Molly’s dad, I have seen in the past). I was impressed with the Sam Daley-Harris discussion in Innovations. We are aware and still trying to convince Kiva that their transparency needs a lot more work. I am even more committed now to continuing to support Kiva while also criticizing from the back seat – hopefully constructively.
October 4, 2009 at 1:59 am
I believe that when I joined Kiva in May 2008, the loans were all disbursed after they were funded through Kiva. Probably over time it became apparent that all loans posted would be funded – usually within a day or two of being posted – so the MFIs started disbursing loans from their own funds and then using the Kiva funds to reimburse themselves, which was a more efficient process. There would often be times when there were no loans left to fund, such was the imbalance of supply and demand.
It has recently reached the point where there are more loans than lenders to fund them, so I think we will see a shift back to the old system.
October 4, 2009 at 4:19 am
Thanks for this superb, informative and penetrating article. I discovered Kiva recently and this is the most revealing and balanced critique I have read so far. It is very valuable – it helps fight knee-jerk reactions for or against what Kiva does, which don’t help people make informed decisions. Some of the points made here are highly relevant to my business as well, so I have benefited greatly from this analysis. Thanks for taking the time to research and write it!
October 5, 2009 at 11:59 am
Kiva is no doubt a path breaking method of meeting the demand of micro-credit at the grass roots. I see it as a boon especially for small NGO-MFIs which are currently caught in the struggle to transform from humble social entrepreneurs to ‘haughty professionalized corporate microfinance practitioners’. In countries where NGOs have transformed or upgraded themselves into NGO-MFIs they continue to retain their original legal status and take up the additional work of foraging loans in bulk from any source to meet the increased demand of micro-credit among their clients, who may be in their third or fourth cycles of loan, would have already proved their capabilities to carry on their enterprise profitably and would be looking forward to enhanced credit. Such start-up small institutions would normally have difficulty in borrowing in bulk from a bank or any other financial institution. It is here that the P2P method comes in handy.
As long as there is an assurance of loan funds coming into a NGO-MFI, I do not find anything wrong in the institution lending from its own resources or from any other temporary arrangements to its clients till the time the loan fund arrives at the institution be it from a bank or a P2P source. One should understand that the NGO-MFI would obviously have a pool of funds, however small it may be, and that the loans to its clients are in fact disbursed from this pool of funds.
This reminds me of some incidents that took place ten years back when I was the CEO of a start-up non-profit MFI in India- 1998- a time when I had to struggle to get loan funds from banks. The concept of microfinance sounded alien to most of the bankers at that time and bulk lending to MFIs was an entirely new product for bankers. Thanks to the equity we had in the institution and the good systems (though manual and too early to think of a MIS), we were able to lend and establish credibility with our clientele and also managed to get one of the best ratings from rating agencies. After months of running from pillar to post I was able to get a bulk loan from a bank. Within a few weeks of the disbursement of the first instalment of their loans the bank insisted on a list of customers to whom their loans were given. I explained that it would be extremely difficult to ‘tag’ customers in that way as we were extending loans from a pool of funds which was existing in the institution as a result of incoming repayments from our clients which included our interest income, our own equity, loan funds of other banks and other cash in hand at that point of time. The bank was persistent. We had to finally incorporate an innovative tagging system in the MIS that we had created at that time and pulled out lists of customers of “their” loans. Some banks had even used the lists to flaunt around saying that they had extended loans to so many poor customers when technically they were customers of the MFI and not the bank. For the bank the MFI was its customer and not the MFIs customers.
Going by the same yardstick I find no mistake or a breach of trust in Kiva’s partner MFIs not disclosing the fact that it had been in fact lending from its own sources till it got the P2P funds. This is the most prudent measure the partner can adopt to retain a good customer or two till actual funds come in. I am also sure that no investor in Kiva would be of the impression that it is ‘his/her’ money that has reached a particular person. I am also sure that a normal investor in Kiva would be aware of the intricacies involved in the time lag of ‘his/her’ money reaching the end user. It just cannot be the same amount sent by a Mr Smith to a poor customer Mr Phong. But the fact remains that a Mr Phong was extended a loan by the NGO-MFI at the right time and the assistance could always be attributed to the help of Mr Smith. I stand to differ with David on this point.
However the most pertinent point has been touched by David- on ensuring the proper utilization of the loan funds lest it may turn out like the child sponsorship example cited by him. What matters is to ascertain if there is a Mr Phong at all. What if the NGO-MFI has been taking Kiva for a ride? Does Kiva have a mechanism to find out if the money really reaches the enlisted people or is it being utilized/diverted for some other purpose? What Kiva’s investor or for that matter any institution which lends to a NGO-MFI or an MFI should look at is the proper end use of the money. Here I would like to open a Pandora’s box on this matter. As I said earlier I was part of an MFI for little over nine years and during the period the institution had a splendid relationship with eight banks. We would have borrowed more than 15 times from these institutions. How many times do you think that the bankers should have visited the MFI and its clients? As I was a rural banker before getting into the shoes of a microfinance practitioner, I would say that the bankers should have conducted at least two visits during the tenure of each of their loans if not more. Sadly that was not the case. While some of them were satisfied with the institution with one visit to the MFIs office, some would insist on a days field visit to the client’s places and that’s all- all part of their pre-sanction process. When I asked one of the bankers why they were not visiting us frequently after their loans were disbursed to us, prompt came the reply that it was a question of trust. “We believe you. You have good ratings, good auditors, a good team and above all you have been prompt in your repayments to us ”, he went on.
Till date I have not been able to digest this answer of the banker. It has been bothering me for quite some time now. I somehow have a gut feeling that most of the bankers do not take the same efforts after disbursing a loan as they take before sanctioning a loan to an MFI. This could also be the case in a P2P channel. Random samples of clients verified by auditors and rating agencies cannot anyway match with an intensive follow-up inspection of the loan’s end utilization. Relying on facts like a good team or prompt repayments or having good promoters or having a good track record of transparency will only lead to complacency. Institutions or P2P mechanisms lending in bulk to NGO-MFIs or MFIs should have their own internal mechanism of a structured follow-up of the loan along with some intelligence sourced from the field if they want their loans to be considered as good assets till they are fully repaid and closed. If such a mechanism is not available within the institution it is high time we thought of a new breed of MFI Loan Monitors which could be outsourced. Not a bad idea anyway. Maybe I could also give it a serious consideration if some institutions want such a service from me.
Coming to David’s blog, I take interest in reading his blog not because he is a good ‘critic’; I read it because he strides into paths not much treaded. His revelations/opinions make people like me who have spent three decades in rural development, rural banking and microfinance sit up and take notice of things around us which not many would have dared to explore. Such revelations are surely food for thought. I wish we had more of this breed so that more sense would prevail in all those good things that we do or are associated with. I think that David has gone a little overboard about his belief of being a critic. It is good to introspect but do not feel bad about self proclaiming as a critic. A critic can never become an iconoclast as long as there are people to respond to his/her cataclysmic insinuations. Unfortunately we have more who respond and virtually no critics in microfinance. So, David, continue your good job and invite good debate on issues pertaining to microfinance.
P.Uday Shankar
Microfinance Consultant & Trainer
Coimbatore- India.
October 5, 2009 at 1:12 pm
David,
First off, thank you for being a critic to the playwrights. We all gain when criticism helps to improve things–and your post is a thoughtful and well-reasoned critique of some of Kiva’s practices. Let’s hope they take it to heart.
Before I comment, I should disclose that I know Matt personally and lend on Kiva.
It seems that the tension for Kiva may have less to do with how transparent they are–or intellectually honest in their description of the process–and more to do with marketing. Kiva now has a quarter million users, nearly $100 million in loans, and is on path to reach $1 billion by 2015. To continue the stratospheric growth they have experienced in four years, they spend a great deal of time thinking about “user experience”, “conversion rates”, and other lingo from the vernacular of Silicon Valley. I imagine there is a desire to keep the language on the site as simple as possible–for, as every website designer knows, pictures sell, not words. As you point out, you can drill down on the site and find the whole story, but the home page is uncluttered.
Your critique is focused on the P2P model, but could just as easily be applied to charities who build wells and supply goats. Think of Heifer Project, for instance. When I last made a donation to Heifer Project, the interface was much like Kiva’s. “Your gift of $50 will enable Heifer to provide a family in Honduras with a goat” or something to that effect. I understand that my $50 is fungible and that it is going to the Heifer Project general fund, and not directly to the purchase of a goat. I don’t think that Heifer Project is being deceptive, rather I think it’s incumbent upon the donor to have at least some level of sophistication when it comes to understanding how international charity works.
I am not trying to justify Kiva’s glossing over of the complexity of the loan process, but I can understand how it came to be.
Finally, I wholeheartedly agree with two of your stated concerns: the first about the potential for one corrupt or poorly managed P2P site to damage the reputation of the industry and the second about the emphasis on microcredit. We in the field of microfinance need to be pushing for universal adoption of client protection mechanisms and for greater emphasis on savings accounts in addition to or in place of loans.
Ryan Calkins
SeaMo
http://www.seattlemicrofinance.org
October 5, 2009 at 2:10 pm
@Annie
it is not the case that this is something that’s changed about Kiva. Kiva has always run this way and always will run this way–indeed it is the way that Kiva needs to run if it actually aims to do good in the world.
The bottom line is not the way Kiva operates; it is the transparency issue and the way that donors essentially pressure NGOs of all sorts to mislead them–and then get angry when the NGO complies.
October 5, 2009 at 3:51 pm
Dear David,
your investigation is remarkable and logical. How ever I may differ from your arguments regarding Kiva because we are working with Kiva in Pakistan for almost three years.They are very sincere and efficient, always keen on do best. If partner organizations could work with honesty and transparently then Kiva would be proved the best poverty alleviation tool.
Farhat
October 5, 2009 at 4:22 pm
David,
Thanks you, excellent article. It made me think that the Micro finance industry has graduated and is a full fledged member of the investment – financial services industry. There are many talented investment bankers who already have targeted the MFIs sector as a growth industry, returns are high relative to other investments 8-10% p.a., historical low default rates, ample demand and it gives lenders (small investors) a feeling of helping the less fortunate in the developing world. Kiva and others like them are probably all ready feeling the competition from the creative investment banking community who are providing loans to MFI’s either refinancing/purchasing the small loans and re packaging selling them to investors throughout the world. What do you think,
Regards
October 5, 2009 at 5:51 pm
Excellent post.
I hope you don’t mind me posting an extract from an unpublished piece I wrote a few months ago. Forgive me shifting into the unpopular arena of politics, but I think this extract shows why extensions of the Kiva model need to be careful to understand properly the illusion, and need to avoid perpetuating the illusion for their own ends.
The playwrights in this case are http://www.lendforpeace.org, who attribute (limited) peacebuilding powers to P2P microfinance. From their website:
Lend for Peace “humanizes both sides of the conflict and affords users of the site from all around the world an opportunity to gain a more personal view of the Palestinian experience.” …and Lend for Peace “will go a long way in contributing towards the healing process of Palestinians when they learn that LendforPeace.org was founded by and is funded by Jews as well as Palestinians working together.”
The critique:
The P2P format has seemingly inherent peace-building potential in that building personal connections is an established tool of peace-building. However it should be remembered that at least part of the P2P connection is something of an illusion created to generate cheap loan capital. Any one entrepreneur borrowing from an MFI doesn’t know where the money they borrowed comes from, and those whose profiles are chosen to help raise cheap loan capital for the MFI are not informed that the money they borrow comes in part or in whole from individuals mostly based in the US – individuals who are also underwriting the loan risk. It is not difficult to imagine a possible impact on repayment rates if MFIs shared this information with clients in regions that have borne the brunt of US foreign policy.
But that P2P microfinance lending is in reality better characterized as P2MFI lending has implications for its peace-building potential. Lend for Peace claims that:
“Every borrower helped through the site will be told by their MFI: your loan was funded in part through LendforPeace.org, an organization founded by young American Jews and Palestinians who want you to know that they and others like them care about your future. That message will spread to friends and family of the borrower, and thus have a multiplicative effect beyond the number of extended loans.”
Whether doing this would have any positive impact is a moot point as the partner MFIs do not communicate this message.
Of more concern than this somewhat sanctimonious text not being read to entrepreneurs is the lack of communication the other way. The very real problems faced by Palestinian entrepreneurs are well documented, as is the fact that occupation is the primary cause. According to the World Bank -“in economic terms, the restrictions arising from closure not only increase transaction costs, but create such a high level of uncertainty and inefficiency that the normal conduct of business becomes exceedingly difficult and stymies the growth and investment which is necessary to fuel economic revival.”
But the powerful emotional connections that P2P can generate are so far not being used to educate the US electorate that helps subsidize the occupation. LFP does post profiles of entrepreneurs on the website, with short personal and business descriptions. This might ‘humanize’ Palestinians to an international audience but the messages are completely depoliticized; any challenges they face are unrelated to the occupation. Indeed the occupation – the primary determinant of the Palestinian business environment – is not mentioned anywhere on the LFP website. By de-contextualizing the problems faced, and by suggesting that the causes of conflict are limited to economic factors, LFP obfuscates the real issues. In a conflict in which the actions or inactions of the US are so significant, the consequences of US policy are hidden from the very electorate that could do something to help.
October 6, 2009 at 12:39 am
Echoing some of the earlier sentiments here, there is a delicate balance between inspiration and integrity that Kiva and others like them have to balance.
Like Kiva, we are implementing a “P2P”-like model for matched savings and are trying to find a way to inspire donors to donate through personal stories but also maintain a level of transparency about where one’s actual dollars will end up.
For us, we’ve chosen to add obvious disclaimer language at the point of donation that makes it clear that a donation will go to the organization which will then re-grant it to individuals who are participating in the program.
But, we do so at the loss of inspiration. We’ve had several users cancel their donations and contact us, frustrated that their dollars were not supporting a specific saver.
So, we continue to search for an answer that can educate our users, but still inspire them to take action.
As for Kiva, I thank them for, once again, generating a worthy discussion through their worthy work.
Dylan Higgins
SaveTogether.org
October 6, 2009 at 11:19 am
Very interesting read. I was lead to this by one of the lending partners in the Kiva group I associate with, and appreciate the reference.
Echoing some of what’s already been said, I was aware of the ‘real deal’ at Kiva before funding my first loan…simply because I spent a few minutes reading in order to make an informed decision rather than lend simply by emotional response. I’ve no problem with the way this system works, nor with the way it’s presented – all the information may not have been in my face instantly, but it was readily available.
My reality check here is, in my view, pretty simple, if I may borrow from your title – What Really Is What It Seems?
Your piece is balanced, in my opinion, but your title might not be.
Thanks for the work.
October 6, 2009 at 11:52 am
Great article, I’m always for full transparency!
Disclaimer, I volunteer for Kiva too.
Good posts like this serve the public by helping to educate everyone about whats going on in the background. Would be cool to see a simple diagram explaining the full process (like this one for the credit crisis http://vimeo.com/3261363)
I think for marketing purposes the diagram keeps things simple, but I think its a stretch to call this deceptive in practice.
It would be like saying that banks are deceptive for claiming that a savings account is a place where you store your money till you need it again, while the real story is that they are lending your money out in the background, and when you want your money back you’re not getting the same exact dollar bill that you put in.
As a child, that’s how I thought it worked, then I grew up, did a little reading and learned the full story
October 6, 2009 at 12:47 pm
OK, I got sucked into another one of your blogs!
I believe that you gave a good view on all aspects…I very much agree that the headline, “Kiva is not quite what it seems” is a good newspaper headline but not really fair either.
Yes, I lend on Kiva. Yes, I am proud to do so. Not because I think I can buy someone a cow but instead to see that a technology (internet, photos from remote sites, the handling of money to remote sites, etc.) can be used for a good intended purpose. The heart of Kiva is in the right place…and a little more disclosure would help.
My story:
In 2007 I took $1500 and split half to Prosper.com (lending to
Americans for a profit) and half to Kiva.org (lending to everyone not for profit). Ok, it was a bad time to lend to America! To date, I lost about $300 on loans I made to Prosper. (OK, some was self inflicted grade D & E loans, but most of my losses were from A & AA loans). One of the loans with Kiva was lost ($25). Overall, I would have been better to put all my $1500 into a CD. Or even cash under the bed. Instead I believe that I have helped a few folks, AND I have learned more about how microfinance works…or doesn’t work!
Nothing is perfect, We are all human (for good and bad)… but my belief is that doing nothing is far worse than attempting to do something.
We all must attempt to help our fellow human, even if that means we must rely on others (Kiva, our church, food collection, giving blood, etc.) to do it.
Let’s hope that Kiva’s critics will keep them doing the right thing forever into the future.
Cheers,
Ian
October 6, 2009 at 2:50 pm
I take issue with a major point of this argument- that Kiva is not transparent enough in its lending practices mostly because, when I first lent on Kiva I had no problem at all figuring out how it worked. All I had to do was click around a bit and I learned more on how the interest rates worked, how they actually lent money to mfis, as opposed to directly to borrowers themselves, and that most of the loans had already been disbursed. What you seem to be saying is that Kiva should cater to the lowest common denominator, to those who aren’t capable of learning this by clicking on several readily available links on the website. I disagree with this since I find it condescending and I believe that anyone with a modicum of intelligence will actually be smart enough to figure out what is going on on the Kiva website and find out what the real story is.
October 6, 2009 at 4:30 pm
Great article.
Kiva faced something many nonprofits and social enterprises face: the reality that their original idea can’t be implemented exactly as envisioned. Kiva gathered so much money that it was impossible to scale their P2P model without corruption and the risk of collapse. To their credit the adapted the model in a transparent and ethical way and are now essentially a marketing and fund-raising arm for micro finance NGOs.
Regarding your comments on the history of sponsorship programs. We run a child sponsorship program for children of slavery survivors so I know how difficult it is to manage a true P2P giving program. We have to limit the number of children we can sponsor so that we can keep up with the record keeping and make sure that 100% of the funds go to the children (we use other donations to run the program).
Charities that run sponsorship programs face a choice of using them to maximize donations or keeping to the donors intent. There should be more disclosure required of the charities so that donors can make more educated choices. I come out of Wall Street and I have been consistently disappointed that charities share much less information about their practice than public companies do. Why do we not demand as much disclosure from our charities as we do from the corporate world?
John Berger
http://madebysurvivors.com/
October 6, 2009 at 11:50 pm
I don’t think it is appropriate to compare Kiva to third world child sponsorship Christian organizations. There are some marked differences, beginning with the fact that Kiva investigates each MFI it partners with (this fact is also posted on the Kiva website and likely stemmed from its Ugandan experience with Mr. Moses) and continuously interfaces with them through visiting Kiva intern fellows. As posted on their website a potential partner must meet the following requirements:
“Serve at least 1,000 active borrowers with microfinance services
Have a history (at least 2-3 years) of lending to poor, excluded, and/or vulnerable people for the purpose of alleviating poverty or reducing vulnerability
Be registered as a legal entity in its country of operation
Have at least 1 year of financial audits
We also prefer an MFI have a profile on the MIX Market (www.mixmarket. org).”
The preference for a MIX profile and the requirement of financial audits also lends another distinction between Kiva and child sponsorship organizations, and that is financial and social performance reporting through microfinance rating agencies, such as M-CRIL (www.m-cril. com). Indeed charities, are not required to disclose such information to donors, and many do not. This aspect affords some form of regulation, demand by investors for transparency, and an actionable effort by MFIs to meet such demands, which is markedly different from InterAction’s development of voluntary industry standards. As investors demand reporting by MFIs, the demand for assessment and rating increases, and such ratings in turn serve to further validate or legitimize individual MFIs, thus attracting more investment.
Also I think a major difference with Kiva is that they do not in any way play on religious beliefs/values/ philosophy. Every single one of the child sponsorship charities you noted has connected their pitch to tithing (the Christian principle of an obligatory contribution of a tenth of income or agricultural production to “works of mercy,” the Church, and/or priest) in the past. Thus many Christian donors feel good in meeting a religious obligation. Since lenders are paid back, I wouldn’t term their loans made via Kiva or the act of lending via Kiva as “private aid,” “charity,” or anything in the vein of tithing. Instead, I believe that the majority of lenders/investors on Kiva participate to feel connected to others (and I wouldn’t term this goal and feeling as neither good nor bad). This is a basic, natural human desire (at least for most people). Some people want to feel connected to other poker players and join gambling sites (is this
good or bad? I don’t know and don’t think it’s my place to judge), whereas some people want to feel connected to micro-entrepreneurs and microcredit borrowers. And of course, some people want to be connected to both groups of people. For Kiva, the “virtual world” connection component is not just between lender and borrower, but also through the nearly 9000 different lending teams that a Kiva lender can join on the website. And I am positive that there is a lot more “real world” interaction for members of such teams, than between actual Kiva lenders and borrowers. Indeed, some Kiva lenders are likely lending to access the team lending connection, utilizing a “virtual world” connection to forge a “real world” connection.
“Surely it would be better for us to give in a way that allows the microfinance institutions to put more of their limited energies into helping poor people manage their difficult lot and less into making us feel good.”
I wish President Obama had put the $1 billion + dollars that he raised and spent on his election campaign into actually delivering “hope” to the poor through non-profit programs and activities that serve them, instead of merely “making us feel good” to elect him. But, aaahhh….. the power of charisma, which propels and drives word-of-mouth, that in turn then inspires us to tune in and get connected.
I’ve yet to meet a successful organization, whether a non-profit, an MFI in a developing country, or a growing public university, that didn’t have a charismatic leader stimulating word-of-mouth advertisement, which is still the best form of advertisement with the highest returns.
October 7, 2009 at 11:03 am
Not a simple post but an excellent analysis – thorough, balanced and realistic. Thank you. As many posts here – we aren’t surprised and remain great supporters and contributers to Kiva.org Still a good reminder to be diligent and not let intentions slip into bad habits that will lead to unethical behaviour.
October 7, 2009 at 4:19 pm
Thanks for your article. I learned a great deal, and perhaps just as important, I really enjoyed reading your post. In addition to all the attention to details about Kiva, I especially appreciated your metaphor about playwrights and critics.
I also appreciated your focus on the interaction between the borrower and the microlenders at the local level. I was on the board of a microloan fund in Los Angeles many years ago. Ironically, we had no trouble finding folks willing to lend us money to make loans. What was really difficult, though, was to find funding to support the work our loan officers did – it could cost as much to prepare a borrower and make a loan as the value of the loan itself, and it seemed very few donors wanted to pay for that critical work. Does Kiva, or some other person-to-person program, do anything to support operating capital needs of the folks who find the good borrowers for us all to support?
By the way, did the macro you created enable you to estimate the likely monthly or annual flow of funds through Kiva? What do you think it’s scale is?
Thanks!
October 7, 2009 at 4:42 pm
As a Kiva lender, I was a bit sceptical that my money was going to the particular person on the website. And now my scepticism is confirmed. Does that make me less likely to continue? Possibly. I will continue with the funds already in my account, but am unlikely to increase them, which I might have done otherwise.
I think it comes down to this – we have seen decades of government and charity led support to poor nations and it seems to have done little except increase the idea that ‘big government’ and more money can solve all problems. The lure of Kiva was that somehow my money was going direct to another person in need, not funding some charity bureaucrat, NGO or corrupt state employee. I suppose it was unrealistic to think this could be avoided.
Many years ago my father was involved with a charity called Send A Cow to Africa. As a farmer he donated several pedigree dairy heifers to be exported to Uganda, which were then given to chosen families. The extra milk yields from purebred stock meant the families had extra cash to feed and educate their families. The cattle could be artificially inseminated and thus provide more calves to be passed on to others in need. It proved to be a successful aid model and continues to this day, though cattle are no longer exported from the UK.
October 7, 2009 at 5:11 pm
Pete, you just described the big economic challenge in doing microcredit: keeping costs reasonable relative to the small loan sizes. Group microcredit is all about reducing costs by shifting certain jobs onto borrowers themselves, including selecting who it is safe to lend to (peers chose each other) and enforcing repayment obligations (through peer pressure). It’s not the kind of credit you or I might want, but it is also normal for poorer to have to make do with lower-quality services, and can be better than no microcredit at all. I wrote about this in my Microfinance as Business report, which I am adapting for chapter 5 of my book.
Pretty soon I should have a pretty full Kiva data set, which will allow the kinds of computations you mention. See this new Brookings paper. I can post the data set.
October 7, 2009 at 5:49 pm
David,
Thanks for your reply. I will look at your Microfinance as Business report and the Brookings paper, and will look forward to your book. I get your point about group microcredit, but I wonder still whether Kiva and other tools direct any energy to supporting the operating costs of staff-supported microcredit programs (and admit I won’t take the time to look into it too much myself).
I also look forward to the calculations you’ll be able to do when you get the full Kiva data set.
Thanks again!
October 7, 2009 at 6:34 pm
The money lent through Kiva is fungible, but a direct tie between user and borrower exists in that if that particular borrower (or the MFI) defaults, the user loses the money lent. The personal connection is not just a marketing tool.
October 8, 2009 at 8:32 am
So what does a real peer to peer model look like and what would need to happen?
One of the key points raised in the article is this notion that Kiva and other p to p sites essentially miss half of their audience. It is interesting to realize that the Baker in India has no idea who the lender is in California. It is also interesting to consider that the Baker has no idea how he is profiled online or to whom his profile is made visible….to what extent does he even ‘choose’ to be profiled online at all and is the online presentation in any way accurate? Where are the privacy issues and who spends the time dealing with them? Or is this only a problem when the Baker goes online to register for an account with Facebook and is then invited to become friends with his California lender?
There is a disconnect here that essentially breaks a genuine peer to peer exchange, a process that really only improves when the person who accepts a loan is also in a position to participate on their own behalf and on equal footing. Then again, Kiva wouldn’t exist if this were not a problem in the first place:)
October 8, 2009 at 10:56 am
Thank you for this thought-provoking piece. It is clear that you have examined all sides of this issue.
What I love about Kiva is its Fellows Program. Having had friends who entered the program to travel to Africa and monitor the MFIs with which Kiva works, I can say that Kiva tries to avoid the pitfalls that Save the Children fell into.
I appreciate the way the Fellows work with with MFIs, ensuring that donor funds (whether before or after they actually donate) are being distributed like they say they are.
Ultimately, I think the process is about showing impact–showing the impact of the dollar lent. It is more about showing impact for the sake of US investors, but the beautiful thing is that showing impact is increasing giving in this case.
Thank you again for writing this piece.
October 8, 2009 at 4:44 pm
Thank you for the great piece on microlending. It was quite informative. To clarify, Dr. Adelman at the Center for Global Prosperity does not necessarily make the claim that private aid is automatically more efficient, or superior to public aid. Rather the data shows that private aid, at least from the United States, eclipses public aid in the sheer size of flows. For instance, in 2007 the volume of philanthropy from private sources in the United States to developing countries amounted to $36.9 billion, while ODA amounted to $21.8 billion. Whether private aid is any more efficient or effective is a question that still needs significant research. Private aid is not a direct substitute for public aid, especially in cases where immediate relief for disasters is needed. However, just because private aid is not a substitute, does not mean that it cannot be a partner to public aid.
October 8, 2009 at 6:04 pm
Thank you for the clarification, Yulya. Here is a quote from Adelman, which I think grounds my own characterization (”Carol Adelman…has argued that private philanthropy is superior to government aid in many respects because it is more flexible and subject to a market test.”):
October 9, 2009 at 6:24 am
Thanks for writing such an excellent, balanced analysis of the Kiva model. I apologize for the rambling – but just wanted to get some thoughts in and pose a few questions for discussion:
The purpose, from my perspective, of Kiva is to increase the amount of capital available to MFI. When Kiva originally started, social investment funds and private equity funds were probably not as keen to invest in MFI’s, particularly start-ups or more socially-focused local MFIs. As MFIs have grown and amassed large portfolios and Kiva has publicized the excellent work of MF, MFI’s have (or should have) been able to attract traditional investment from social or non-social investment funds. However, what MFI would ever trade FREE capital w/no required return for traditional investment? In early 2007, one of the first recommendations my associates working w/CREDIT MFI in Cambodia made to management was “Hire staff to immediately work with Kiva. It is free, easy capital with zero cost and low expectations from the lender.” What better way to create additional profits for shareholders?
Under the assumption that private investment is easier for more MFIs to access today (and I can state that from personal experience at a few MFIs here in Cambodia), is then Kiva’s ultimate beneficiary the shareholders of these MFIs? Kiva isn’t necessarily increasing the amount of capital available to MFIs to lend – just providing an alternative stream at zero cost. Is this sustainable in the long-run? Is this overstating MF’s social impact and financial sustainability?
Furthermore, the fact that Kiva has little weight within the structure of the MFI partners is concerning. If I invest $100,000’s in a private venture, I would assume that I have some weight on the Board of Directors to ensure the organization uses the funds appropriately to accomplish the goals outlined in our JVA or investment agreement. If the general goals today in MF are to increase the capital available for lending and to drive down interest rates, what is Kiva as a massive lender doing at each of the MFIs to catalyze change? What is Kiva doing to ensure its capital is used wisely and ethically? Stories abound in Cambodia of clients borrowing from one MFI to pay another MFI, finally going to an informal lender to pay off all parties. Has the social impact side of this been lost due to a vacuum of accountability?
Tim
October 9, 2009 at 9:54 am
Tim, I’d quibble on just one point. Kiva’s capital is not free to the microfinance institutions (MFIs). In fact I think
they charge 2%/year(they considered it but don’t), and there is the cost for the MFI of collecting, translating, and posting the stories. That some MFIs choose to work with Kiva of course shows that they consider these costs reasonable…Update: Kiva has some estimates of the administrative costs for MFIs.
October 9, 2009 at 9:05 pm
David,
Thanks for this post. I appreciate your concern for Kiva’s mode of operating, while still recognizing the complexities of the situation.
I wanted to underscore the fact that Kiva does not actually hide the way they operate–as you say in your post–they just aren’t as up front about it as some might like. I became involved in Kiva early on, in March of 2007, by starting a campus microfinance group. I contacted Kiva around that time to ask them a few questions, and they were very straight-forward about how they operated. (They even sent me the “real” loan diagram, in contrast to the one on the site.) I was surprised at this, but my commitment to the organization didn’t falter and I kept raising campus resources for them. The campus group eventually started to move beyond Kiva, and now we are making direct loans to MFIs in several different countries, but that move away from Kiva was only in part because of their “deception.”
In my opinion, the answer to the conundrum you posit at the end of your summary is something along the lines of “the ends justify the means.” Kiva has raised a lot of money for some very good organizations, even if that was through somewhat deceptive advertising. I don’t know the costs incurred by the MFIs because of Kiva’s requirements, but I know that they benefit greatly from the partnership. Kiva’s explosive success, I feel, is a direct result of that advertising, and without it, it would not be able to funnel as much money to MFIs. Because they only hide their true operations on the most superficial of levels, and anyone who does a small amount of digging can see what actually happens, I think what they have done is justified.
Beyond that, I think Kiva has been a great window into the world of microfinance, and by extension, global poverty. The person-to-person contact of Kiva (and microfinance in general) has made many individuals think more about people’s lives in the Third World. The lure of Kristof’s “good” feeling opened up a lot of mutually empowering opportunities and connections on my campus and across the country, thanks mostly to Kiva.
Thank you for your time and your concern about the nuances of microfinance. I can’t wait for your book to come out.
Jeff Raderstrong
Social Entrepreneurs of Grinnell
October 10, 2009 at 9:44 pm
Thank you for an interesting and informative article. I have lent on Kiva for eight months, and I feel that they make clear how their model works. On each loan the “Date Disbursed” is visible, and in discussions in the team message boards, it is often mentioned that the loans have already been given out.
Lenders still feel a bond with the particular entrepreneurs whose loans they are supporting, though. In fact, people often find it important to select particular loans to support, for example, “green” loans to activities that help the environment, such as selling recycled clothing. Although they know that their money doesn’t go directly to that individual, but to the MFI.
The person-to-person model is not deceptive if the lenders understand how it works, and it obviously is a good fund-raising tool. It’s also educational for Americans – I am learning where different countries are on the map, their primary products, etc.
Twenty-five years ago, I sponsored a child through Save the Children, and I felt they were honest with me. They explained that the money did not go directly to the child’s family, but to a project that helped the entire community. It was a water project in Mauritius. After a year, the project was successfully completed, so Save the Children moved on from that community, and ended my sponsorship.
I feel that my contribution helped in that case, but now I would not choose to sponsor a child because it seems almost like the child is being used to generate sympathy, it seems too much to expect of the child. If I want to help, I should help without the child having to pose for pictures.
I think Kiva is different because the entrepreneurs are not receiving charity, but a loan which everyone knows they will have to pay back. Still, I am aware that they are giving up some degree of their privacy when they agree to be listed on Kiva.
I still think Kiva is valuable, though, both in terms of the amount they have been able to raise and in terms of educating Americans about the Third World.
October 13, 2009 at 10:11 am
Matt Flannery, Kiva.org CEO and Co-Founder, has responded to this article, and David has posted the response here: http://blogs.cgdev.org/open_book/2009/10/matt-flannery-kiva-ceo-and-co-founder-replies.php.
October 13, 2009 at 9:15 pm
David, thank you for kicking off this wonderful conversation. My additions to the discussion:
http://sashadichter.wordpress.com/2009/10/13/kiva-customers-don%e2%80%99t-receive-the-loans-you-give/
October 14, 2009 at 3:46 pm
Thank you very much for posting this detailed look at Kiva’s lending model. I myself was surprised two years ago to learn that Kiva is not actually a P2P lending mechanism. All of the publicity that I had seen up until that time (including the web site & TV interviews of the founders) made me feel as though I had been intentionally misled.
While I understand that in logical, logistical and financial terms a P2P model may be untenable, I do hope that Kiva can find a way to more clearly communicate their model to individuals that choose to partake in lending on their web site. It seems like additional transparency on the web site would be an easy way to mitigate the potential risk of a misunderstanding, bad publicity, or future backlash.
What I personally find more difficult to understand than the transparency issues discussed above, is why Kiva does not leverage its position as a source of international capital for MFIs to make an impact on lending and financial practices at the institutions to whom they lend. If the MFIs actually need the capital from Kiva, then they should be required (and also willing- if there is indeed a veritable necessity for capital) to make real commitments to improving financial services, reducing interest rates, and passing the benefits of the 0% interest financing from Kiva on to their customers, rather than simply making a larger profit for shareholders. I suspect that many of the MFIs would choose to find alternative sources of capital from the commercial market, and that this would help Kiva concentrate on just those MFIs that are willing to substantially improve the way they operate.
I have been working in finance in Uganda for the past 2 years, and from what I have seen, the profit margin on microlending can be huge- especially in sub-Saharan Africa. Many MFIs use ‘flat’ interest rates, hidden late fees (which most customers incur), and high origination fees. It is not at all unusual for the actual cost of borrowing at MFIs to be the equivalent of well over 50% APR. I don’t see why these MFIs need 0% interest loans to on-lend to their customers at 50%+.
In my opinion, Kiva would likely have a stronger impact if they were to concentrate their resources and work with a smaller number of financial institutions. With these institutions, they could also work to improve banking capacity and services (both savings and lending) to the benefit of MFI customers.
Thanks so much for providing an opening for this conversation to take place with your article!
October 14, 2009 at 10:43 pm
Recent comments have made many references to shareholders. Careful clarification should be duly noted that the vast majority of MFIs are non-governmental organizations (typically non-profits) and are not publicly traded with “shareholders” and dividends.
October 15, 2009 at 10:44 am
David,
This is a well written, balanced critique, without “appearing” to take sides – quite a task to achieve esp. when you are writing about a brand as popular as Kiva.
As far your (as well as Matt’s) argument that pre-disbursement is the most efficient way of doing it, I don’t really see a point in
From my personal experience working with one of largest MFIs in India – the process of loan disbursement actually works is quite different from what is envisioned by most of us.
A) No, clients dont get their loans whenever they want to get one, there are fixed cycles/periods when MFIs actually make disbursements in a particular village/center. Reason: Process EFFICIENCY
B)If you are a new client who has just enrolled with the MFI, there is a “waiting period” (essentially to check your attendance, commitment as well as understanding of the process) before which a loan is sanctioned. 99.5% of the new borrowers abide by these procedures to get the loan.
For example, if you are a new borrower who has just enrolled with the MFI as their client, it takes nearly 4-6 weeks (timed with next loan disbursement cycle in that village) to get a loan. Similarly, existing borrowers who wish to take a new loan are informed of the loan cycles and periods.
So why did i explain this? Simple. If a new client joins the MFI, its a standard norm to wait for 4 weeks. So the MFI could take their visuals and biz description, upload it in Kiva appropriately timed with normal loan disbursement. The process also becomes simpler for existing clients where MFIs can again upload the profiles a month in advance of loan disbursement.
Maybe I am talking about how it works only in India – not sure if it’s the same around the world. Would be great if someone could clarify this.
Anoj.
October 15, 2009 at 7:39 pm
One small quibble that I haven’t seen mentioned in the comments yet:
You say “MAXIMA might cover for her in order to keep its Kiva-listed repayment rate high.” While this is technically misleading again on the part of Kiva, this is fairly standard in the world of microfinance.
Often, a “joint liability” loan group will come together and pledge to cover the losses of any single member. Not only does this increase the repayment rate, but it also creates social pressure for all group members to pay the money back, and a strong, positive social network of support in achieving success. Even if this were disclosed, the whole point is that no single individual is faulted for failing with their loan. It’s the group’s loan and the group’s responsibility to pay it back.
October 15, 2009 at 10:25 pm
Mark, the loan in question is an individual loan, not a group one. Anyway, even if it were a group loan, I believe my comment would apply: if the group as a whole defaults, then the microcredit might still cover for it in order maintain its Kiva-reported repayment rate.
October 17, 2009 at 10:36 am
Ok I can understand David’s point but I think it overlooks two main issues.
1) Banking – Until banking systems improve or sites like paypal extend there reach its very hard to send money directly people in developing nations. Yes I sending money directly to people who need it would be great but I don’t think its realistic just yet. Believe it or not its actually faster and cheaper for my family in Panama to send me money than it is for me to send them money.
2) Finical Responsibility – I think even if we could directly fund individuals it might not be a great idea. Finical literacy and responsibility are not as common place. Even if I could give $5,000 to improve their store, its hard to tell if that is what they would use it for. I want to be careful here and make sure no one takes this the wrong way.
I am not saying that people bad and that they blow the money on something else. However the reality is that when you just make enough to get by, you get a fresh source of income and something goes wrong you are going to use that new income even if its not meant for that reason. I say from personal family experience.
I do think we need these \middle men\ to both deliver the money we give and to help those in need manage it correctly.
Saying that Kiva.org isn’t quite what it seams might be true but I’m not sure its fair. Sure the story of lending directly to people is a form of marketing but its an important part. It’s also far more transparent then say donating to the Red Cross.
I get what you are saying but until someone can solve the two problems above I think this is a great way to do it.
October 19, 2009 at 7:38 am
I do not really agree with your criticism of Kiva. Before lending I looked at the site and it told me everything I needed to know about their method of operation. Yes, there are some inconsistencies, but it was not hard to work out how they operate. It is sensible, efficient and reasonable. Yes, there is always the risk that a local partner can go bad. However local organisations have a much better chance of helping people than foreign volunteers and gap year kids parachuted into another culture with a photocopy phrase book and a warm inner glow. Yes, microfinance will not save the world – but neither will sitting back on our asses blogging about how those that are trying to could do it better.
October 20, 2009 at 5:46 pm
Thanks for this. As a Kiva donor, I’m feeling a bit ambivalent. On the one hand I have been conned for quite a while. On the other hand, I understand their motivation. I also understand that perpetuating this whole fiction of stories and photos designed to tug at the heartstrings is expensive and reduces the amounts available for lending. I’m not sure how this will affect my level of giving, but it’s unlikely to encourage more generosity.
Initial impression: Kiva has fallen into the Professional Fundraising ethos that justifies bending the truth to bring in the dough. “Truthiness” is all that is required.
November 9, 2009 at 6:58 am
Hello David, I totally agree with you on all points.
I live in Uganda I heard about Kiva in blogs and the internet so i decided to visit the MFI parters here in Uganda, first i got stories from members and when i also inquired i was very evident to me that KIVA is lying a lot about what they actually do. In fact it seemed to me that they actually never connect with real people but only MFI partners. This is was a total Illusion and unfair.
November 9, 2009 at 7:59 am
Good to see this thoughtful discussion going on. The Kiva model – and marketing – doesn’t just affect online lenders and borrowers. It also has implications for the MFIs that can benefit from the capital that the platform funnels their way. This paper written by Deb Burand covers some of the issues that online lending raises for microfinance institutions. While recognizing the power and outreach of these new platforms, Deb highlights some issues MFIs should consider before signing on:
http://www.cgap.org/gm/document-1.9.34243/FN54.pdf
November 9, 2009 at 8:49 am
This post and the response has been very enlightening. I am disappointed to learn that the Kiva organization has not been up front about how monies are dispersed. It seems that Kiva apparently thought lender’s would not understand the process. Explain it and we will get it.
Does this mean that I will stop giving to Kiva? No, I believe in this organization and hope, no I expect to see real transparency in the future.
November 9, 2009 at 10:58 am
I decided to never donate ti Kiva again after I came to feel that their actions are designed to get individuals like me (techno-challenged) to “donate” their loan amounts to Kiva rather than to re-loan them. They do this by making it so difficult to reloan that one has no options but to simply donate.
I am way beyond the “maybe its me” phase. I have written down each and every instruction and followed them over and over again with no luck.
I feel they are a scam outfit and simply delete their endless “You have money in your account” spam.
November 9, 2009 at 11:01 am
Can anyone suggest other organizations which are more transparent and user friendly to folks like us that would like to keep giving?
November 9, 2009 at 11:30 am
Thanks for the post. As a KIVA lender, I’ve known that my loans went to the institution sponsoring the entrepreneur, but not end up in their client’s business directly. If you look at the money in a chronological fashion (time 1, I send money, time 2, loan is made), this would be correct. However, that’s not the way to look at KIVA’s work.
It’s a cyclical flow of trust and credit, which is what’s brilliant about KIVA. The micro-lending institution gives a loan to X entrepreneur, with a strong believe that Y lender on KIVA will back the loan. Its a credit system people! If KIVA weren’t on the other end, would the loan have been made?….that’s the question.
Now, if the micro-institution continued accepting money from KIVA Lenders, on top of the loan amount, then clearly, this would be suspect. But its capped at the loan amount. Which, in a fiscal year, can be attributed to that entrepreneur.
The notion that hard money flows directly to the entrepreneur from my bank account is ludicrous. If we take that approach, then my money never actually makes it to KIVA. My money is traded for Bank of America money, which is sent somewhere else, and KIVA is credited using credits from someone else.
Perhaps we could mail dollar bills to the individual entrepreneur to absolutely ensure that every penny is given directly to the entrepreneur (maybe this would spawn a new business in local villages too, currency exchanges….)
I believe they can still say, connecting lenders to specific entrepreneurs. Because they do, through a credit system employed by their partners.
November 9, 2009 at 2:49 pm
Bottom line with Kiva is they have been incredibly deceptive in their promotion of the service. I expect that the specific person or group I loan money to is getting my money. If that is not happening, why does Kiva list the sad stories of all the people in need with their pictures and then status updates along the way? It’s assumed my money is helping that person. Turns out, my money may be helping that person, then again, maybe not.
I am very disappointed and feel like Kiva has cheated me and cheated in the way they promote their loans. I have loaned to 98 people over $3,500 in the last several years. Once my loans are repaid, I am gone from Kiva. Very sad that thousands if not millions of other kind people have also been duped by Kiva.
November 9, 2009 at 5:35 pm
Thank you for exposing this debacle. When (If) my loans are repaid I am out of there.
November 10, 2009 at 7:08 am
Having been born, raised and lived my life in a poor country like Uganda in Africa. It is very sad to see what what these poor communities go through in order to get the so called credit from America via KIVA. First the truth is that the micro finance partners know very well how to take advantage of these poor people on high interest rates despite posting their photos on the kiva site. KIVA has made it very hard for lenders to directly contact the entrepreneurs they loan which is so sad. Knowing very well that most of these people in Africa have limited access to internet and may be unaware that someone else did actually connect to by making a contribution to KIVA. The good news is that most places in Africa like Uganda are now connected over the internet and most parts have mobile internet. I think there is need for a model like the one kiva says it is but actually ends not doing, by that i mean connecting to the real people (entreprenuers) via an internet portal. As for KIVA we can simply say that they just LOAN MFIs and not Entreprenuers, Just a total Illusion….!! It,s too sad!!! Some one help us!
November 10, 2009 at 10:38 am
Sherry
When you get “out of there”, please post how you did it in easy to follow steps. All we can ever do is come to endless new “Donate to Kiva” pages.
We’ve wanted out for several years but won’t reward those that we consider cheaters.
Welcome everyone. We are pleased that we are no longer alone.
Again we ask for direction to another organization true to the ideals paid lip service to by Kiva.
November 10, 2009 at 10:45 am
I’m a Kiva donor I was going to write what #48 Dan Melton wrote, but he worded it so much better than I could have.
Thanks, Dan!
November 10, 2009 at 11:26 am
Nevermind Sherry
I was able (duh) to follow steps in getting my investment refunded. I had been hesitant to do so before I learned how many of us there were in the world.
Now I have the funds in Paypal and still seek a more worthwhile organization to redirect them to in near future.
Thank you all for being there (here) and this whole thing is regretable.
November 10, 2009 at 12:44 pm
David #46,
I’ve been re-loaning for about 2 years now and wouldn’t consider myself all that Internet-savvy. Once you login to your kiva account, you can re-loan by hitting the “Reloan” button, proceeding through the usual process, and using the “Use Kiva Credit” option. Just underneath that “Reloan” button is the word, “withdraw.”
If all else fails, consider availing yourself of that boon to the technologically-impaired, a teenager, available almost anywhere computers are to be found.
Sarah
November 11, 2009 at 2:50 am
i did contact kiva when I read about it, not sure from which website, money or bbc technology. Anyway, I tried to get an impresssion as to the expense vs real funding to the people ratio. I hate to have my “donation” (I do not expect a return) no matter big or small, where more than 20% to the organisation expenses, funding volunteers’ vacation trip as field trip etc. or just to keep oiling a mamoth organisation. When I do not have a clear reply from Casey Wilson, founder. I retreated. I want to do good, not to feed another claim to do good organisation. I sure hope kiva is legitimate (in terms of really helping those who need and should be help) and not another one that scam those who want to do good in whatever small way we could.
November 12, 2009 at 1:36 pm
Those of us who make microloans here in the U.S. are thrilled that Kiva has brought so much attention to domestic microfinance of late.
As the CEO of Opportunity Fund, a San Francisco Bay Area microfinance institution that is one of Kiva’s first two U.S. field partners (the other is Accion USA). Opportunity Fund has been making microfinance loans in the U.S. for fifteen years. Kiva is bringing new attention to our work, and Kiva’s users are providing us a wonderful new source of capital.
We see Kiva as an important partner in the field of microfinance. Kiva has the market convening power and technology to connect individuals with MFIs all over the world at a scale that MFIs in the U.S. or around the world could not achieve on their own. To date, we have been too disconnected as an industry and focused on the business of lending out in the field to harness individual lending in a meaningful way.
On the other hand, Kiva would not be able to do what it does in so many countries without the hard work and exceptional value its field partners bring to the table. We are the ones finding the borrowers who need help, screening them for creditworthiness, and ensuring that the precious dollars of Kiva lenders are going to deserving people with a high probability of paying the loans back.
The answer to the question about whether Kiva users are, in fact, making loans directly to borrowers is more nuanced than the recent debate suggests. It is true that the vast majority of borrowers on Kiva get their loans before their request is posted. It is also true that the repayment of the Kiva users loan is tied directly to whether a specific individual pays back the loan. So the Kiva user really is choosing which entrepreneur to bet on. Over time, as an MFI partnering with Kiva is allowed to post a growing volume of loans on the site, the MFI will be able to use Kiva as its major source of capital, and require only a small working capital pool to issue new loans.
Kiva is a marvelous innovation, and has channeled tens of millions of new dollars into microfinance lending. Access to capital is a need for many low-income entrepreneurs in the U.S., and we are happy that Kiva is helping raise awareness about it, and that thousands of Kiva users have shown their support.
November 13, 2009 at 10:39 am
Like many people who have read David Roodman’s article, I have grown very disillusioned with KIVA – a nonprofit I thought was above the fray. David’s article is good on many levels. It speaks to facts v. fiction as well as confronts us about this human defect we all have which involves soothing our egos and our eyes instead of doing the work it takes to make things better or right.
Kiva is youthful, popular and slick looking which makes it the “new solution” that’s going to make the world better, one click at a time.
The moral question is: Is it Kiva’s fault that we the public are so drawn to a quick solution (just a “click away”..) instead of really getting involved, doing the research to tell us if something is real or not? It’s not KIVA’s fault that they are selling what works. After all, we want to be distracted by an easy, simple solution that requires a mere click. “I just bought a $400 iPhone but hey, I did send $25 to Turkmenistan so I’m good.” – Who’s fault is that?
The truth is there where there are charity organizations, there is corruption, even of the mildest kind. The company will always pay itself first and foremost. And as time goes on and the stakes get higher, more money is always needed (sounds like church).
Sound cynical? If so, then you may be one of those people who need to feel good despite reality which sadly is a lot harder to bare. Kiva is to charity/nonprofit what eHarmony is to marriage. Millions of people are convinced that they are only a few clicks away from finding their “soulmate” so why shouldn’t they expect to save the world the same way too (it’s so time efficient and I can do it while wearing my pajamas)?
Kiva’s CEO appears sincere, but that may be youthful idealism. With time, Kiva will begin to resemble its corporate counterparts. It is inevitable. And with all the money and fame it is enjoying in such a short amount of time, it has already become a major player in the nonprofit world ready to flex its own muscle and branding power. This inevitably leads to more demand, the need to churn out more product and of course, more employees to manage all the money coming in.
The moral of the story: If Bill Clinton and Oprah start singing something’s praises and begin insisting that they have found the greatest thing since sliced bread that we must all support: Run! Run the other direction before they sell you the latest “feel good appeal and you end up supporting the next misrepresented nonprofit out there!”
November 15, 2009 at 9:20 pm
Ever since hearing Uma Narayan’s critique of microcredit, I’ve been curious to hear more about microcredit. I’m not a donor to Kiva and partly the cynic in me wonders if this is a way for bourgeois elements to try and feel better about themselves by engaging in philanthropic work by helping poor people in the 3rd world while their own patterns of consumption that cause the conditions of inequity in the world don’t alter. This blog post was really interesting and I’m grateful to you for providing evidence of why kiva is not all it presents itself to be.
November 16, 2009 at 7:56 am
Comment on David Roodman’s post blog in (certainly) enjoyably imperfect English –
French people have this sticky reputation of self sufficiency over the language of Molière, and their gastronomy…hence we did not want to disappoint you with a perfect written English (that we do practice).
When we first founded Babyloan, we took a very hazardous bet: breaking the very old French habit of good charity and giving to help very very poor people by offering a new revolutionary way: lending to a micro-entrepreneur. The self made man myth and the entrepreneurship are not pillars of our French society.
Even if we had legitimate experience and expertise in microfinance, nobody had heard about us and we had to prove our credibility. We did not know much about the Internet (even less than what we knew about English…) but guessed that we had better be very transparent about Babyloan and its mechanisms. Unlike other small actors (as we were and still are), we submitted our project to the French financial regulatory institutions to testify its feasibility, law abiding and seriousness. This is mainly due to Arnaud’s past experience as a jurist and a banker ( as the French would say “more cautious than a jurist and a ‘bankeur’, tu meurs (that’s to say, there’s nobody more cautious than a banker).
In the same logic of being unreproachable, we decided to show and explain as openly as possible how Babyloan works to our internet users. So far, we thought we had done this for not much – most of our internet users certainly do not know the reality of refinancing fo peer-to-peer lending websites– even though we placed it on the website so people could access the information in one click from the home page (you can find it in the cycle of my money ).
We are glad and proud to be quoted as a very honest peer to peer lending website, as it was a must from the start! We certainly have a lot to learn and to improve (in addition to our English version..that we are currently working on) and are glad to be part of the debate and be inspired by your remarks!
Aurélie and Arnaud, co-founders of Babyloan
November 17, 2009 at 10:10 am
I read with great interest your very thoughtful blog as well as the more sensational New York Times article about Kiva’s loan disbursement disclosure issues. I agree that Kiva could have done a better job of explaining the nuanced realities of fund disbursement on its website. And I think that insightful blogs aimed at holding Kiva accountable are useful and will serve to strengthen the organization. But beneath all the controversy, for many, I think a line blurred between connecting to an individual and controlling an outcome.
As lenders we like to think we are really making a difference in someone’s life and we are…but it’s complicated and it actually bumps up against something we all value greatly about Kiva: Empowerment. For all three stakeholders: lenders, borrowers and MFIs empowerment is key.
I completely understand that stories and photos are a necessary piece of the Kiva model, but can you imagine going to your bank for a loan and being asked for a photo and life story? And then be told that this photo and story will determine your loan approval outcome? Not empowering. I much prefer that Kiva’s carefully selected MFI partners are trusted to make their own lending decisions based on business criteria. As lenders we can feel connected but the control of who gets funded is best kept in the hands of the MFI.
I actually think most Kiva lenders like very much that Kiva promotes a business-type relationship between the borrower and lender. These are loans – not donations. And following this logic, loans are about creditworthiness not appearance or life stories or likeability. The fact that pictures and profiles are necessary to create empathy and elicit our generosity is ok with me – we are human, but I prefer that they are not the final random, subjective arbiters of who gets funded.
I think that all of this points to a plural P2P model for Kiva. People to People lending (with regional, country and/or MFI selection enabled) will be a good thing, and I suspect that the empathy-generosity link will not be jeopardized. As lenders we do lose some perceived control but the connection is still there. Without being to preachy, in my opinion, the connection we feel when we lend is not so much to the specific person: it is a connection to humanity.
People to People also solves for two things that I find unsettling (and dis-empowering) about the concept of “Person to Person” lending as it stands today. The first is that the person I lent to did not know who I was—it seemed unequal and unfair to me. (Even if they could get online access, many Kiva lenders choose not to have their photos on the site).
The second thing that troubled me was learning that the loans that get funded fastest are inevitably those with an attractive person in the photo, smiling brightly with a touching story that mentioned sorrows endured. Other equally deserving but less appealing looking people, perhaps not smiling enough, or with stories that were somehow not evident of sufficient hardships or pluck or whatever struggled to receive funding. I think it is dis-empowering to the MFI and the qualified borrower. (I was heartened to learn that there is actually a Lending Group that focuses on loans about to expire).
As a lender, what I really should care about is to know that all of the intended funds are actually getting to a borrower screened and vetted by the specific, capable MFI partner chosen by Kiva. This is something I can definitely vouch for in Rwanda from my experience here. Good loans are being made to deserving entrepreneurs.
So in all this rambling, I submit that a People to People model removes bias and prejudice and levels the playing field, empowering in equal measure borrowers, lenders and MFI’s alike. This is certainly a good thing.
As for the optics and transparency regarding the mechanics of actual fund disbursement realities, I say good catch by Roodman. I also say that Kiva has responded in a balanced, reasoned and open way that reflects well on the organization. It inspires confidence that as it grows and evolves, Kiva will continue to strive to do the right thing in the future.
Let me end by saying that I am very proud to be a part of this dynamic, innovative and caring organization as a Kiva Fellow.
November 17, 2009 at 4:26 pm
I literally felt ill when I read David Roodman’s account of KIVA. The quote from the CEO “It’s highly imperfect, but like a 3 1/2 year old child: it has a lot of potential” put me over the edge.
My early teen daughter and I spent hours deciding on just the right people to support and have been getting those KIVA emails for the last two years. All fiction. This is just like Madoff.
They have told a lie and repeated it. They are liars, pure and simple. These are intentional lies to mislead investors like my daughter. This is not “imperfect”; this is a lie, and they have the arrogance to believe they know the greater good.
Count us as another group going to the California Attorney General. The shame is this now gives all micro lenders the same bad name. Shame, Shame, Shame.
November 20, 2009 at 1:09 pm
Controversy or not?
A debate seems to be rising about the way peer-to-peer microcredit platforms work. It may not function the way it seems.
The presentation messages of Kiva.org, the American pioneer, might have led the internet users to believe that their online loan was directly allocated to a beneficiary who was (im)patiently waiting for it. Yet, the most curious and interested recently discovered that Kiva was in fact a refinancing platform on which internet users only refinance projects already financed by the microfinance institution (MFI) with its other resources.
What’s going on? What is Babyloan’s opinion on the subject?
In fact, there are two possible ways for such platforms:
- Direct financing : the beneficiary waits to be financed by the internet users and gets his microcredit once the MFI has received the money
o Advantages: 1. For the internet user : it’s true and direct peer-to-peer lending
2. For the MFI : the management is easier for the MFI since there are no distinction nor time gap between the financial flows (money transfers, repayments, etc.) and information flows (progress of the project of the micro-entrepreneur).
o Drawbacks: 1. For the beneficiary: the development of the beneficiary’s subsistence activity depends on the “clicks” of the internet users and thus on the popularity of the project (picture, theme, etc.). Yet, obviously, what is fashionable here (organic products, fair trade craftwork) does not necessarily corresponds to the reality on the field…this is what we call “microcredit reality show”!
2. For platforms like Kiva and MFIs: to make true P2P lending, the money should be sent as soon as the total amount of the loan has been raised from the internet users. This could represent dozens of money transfers per months, which are costly for the platforms and for the MFIs who receive the money. The high cost of true P2P lending could endanger the economic model and durability of such platforms when the minor profit margins they choose to take already make it long and difficult to reach the economic balance.
- Refinancing: the internet user refinances microcredit beneficiaries already or about to be financed by the MFI (Kiva’s model).
o Advantages : 1. For the beneficiary : the project can be developed even if internet users do not eagerly refinance it – which is essential, especially for agricultural or seasonal projects.
2. For the MFIs: since they advance the money needed to finance the entrepreneur’s project, they can manage their accounts more strictly and be less dependent on the fluctuation of the internet users’ generosity. They are able to anticipate since they do not work “just-in-time” with the platforms.
o Drawbacks: For the internet user: the model seems less true.
For Babyloan, we chose the same model as Kiva, i.e. refinancing, since we think that the “reality show way” is iniquitous. And we chose to announce it one click from the home page : http://www.babyloan.org/fr/Fonctionnement-Cycle_Mon_Argent.html
Kiva seems to have oversimplified the explanations, maybe leading to believe that its model pertains to the first way rather than the second.
On all subjects, Babyloan always thought that the complexity of this new solidarity tool required, in all respects, the greater transparency. During the preparation of Babyloan’s website, it seemed essential to be completely transparent, even if it meant discouraging some internet users. This is what clearly transpires from the contracts signed by the internet users and from the explanations of the website. By the way, certain members already questioned us after reading what we wrote. Many press or internet publications explained our refinancing mechanism very simply, because that’s the way we always explain it.
Fundamentally, Kiva deserves all the credit for inventing this wonderful solidarity tool. There would not be around 15 platforms of the same kind around the world without this invention, let’s not forget about that.
The refinancing model we have chosen does not make it useless. Indeed, if an internet user chooses a beneficiary and its money is allocated to this beneficiary, the credit line already advanced by the MFI is available again, which enables the financing of new beneficiaries and thus the development of the MFI.
Let’s go further. In the case of a direct financing mechanism, the MFI should publish projects that have not yet started on the field. For example, the internet users would decide to support Kim’s project to raise chickens. By the time the total loan amount is raised and sent to the MFI, the project may change (decrease in the price of pigs which would make Kim change her mind, deep change in her personal situation).
What should platforms like Kiva and Babyloan do in such a situation? Do not inform the internet users about this change – the worst choice in terms of transparency, ask the MFI to publish the new project, tell the internet users and repay them if necessary? Imagine how complex this would be and what workload we would impose on the MFI. This would take us away from our mission: support these institutions and their beneficiaries.
In the Kiva and Babyloan model, the internet user definitely contributes to the development of the project of the entrepreneur he chose to support and of the MFI, which is essential.
Fundamentally, as far as the interests of the beneficiary and of the MFI are concerned, this “controversy” is unfounded. Kiva’s mechanisms, such as Babyloan’s, do reach their objective which is to enable the MFIs to finance the greater number of beneficiaries.
If Babyloan decided to be transparent, it’s less for fear of controversy than because we chose the refinancing mechanism. We take the entire responsibility for this choice and can justify it (increased computer complexity, possible additional workload for the MFI, higher costs, etc.).
However, what is clearly at stake here is the allocation of the internet user’s money. Whether it is refinancing or direct financing, the money is fungible and arrives on the outstanding account of the MFI before it is allocated to a beneficiary. It is then physically impossible to prove that the 20 Euros of Ms X, fungible by nature, will be delivered personally to the beneficiary she chose. It is simply impossible. What do we do then? We ask the MFI which receives this money to justify that this 20 Euros is really allocated to the beneficiary chosen by the internet user.
There are two possibilities: either the MFI has got a sophisticated information system which enables her to track on its accounts the credit line allocated to each of its beneficiaries. Then it’s easy: the MFI just has to create for our beneficiary a credit line called “Babyloan”. Yet these very refined systems are quite rare among MFIs. Concerning Babyloan, every six months, we ask the MFIs to officially certify that the money they receive is really allocated to the beneficiaries supported by our members. They send us a certificate signed by the directors of the MFIs. This document lists all the beneficiaries that were supported and refinanced by our members and the money received for that purpose. It is a major constraint for the MFI which makes the commitment to allocate the money to credit outstanding (not to its operating costs) and certifies its real allocation (which would have been the same in case of a direct financing mechanism).
The solution to this problem requires the improvement of the MFIs’ information systems. In the future, they might be connected to the peer-to-peer platforms which would mechanically allocate the money of each loan to the chosen beneficiary.
This is what Babyloan launched with the credit monitoring software OCTOPUS. A version was adapted to integrate a Babyloan application. It enables the MFIs who use it to automatically upload beneficiaries on Babyloan’s website and to allocate precisely the money lent by the internet users. This tool has yet to be improved to be used by the greater number of MFIs. Its use has to spread, but this is another story.
It is obviously essential that the flows generated by peer-to-peer platforms should be completely transparent. The standards of the profession are being established little by little, based on experience and have to be clear on that matter. A few weeks ago, in France, we decided with the support of the national regularity authorities, to work on the redaction of national regulatory standards for this new activity.
That is what it costs to be transparent and we are proud to be the standard-bearer. It is an essential matter. Every platform must satisfy the verification of its eligibility with regard to the regulations of its country of activity. That’s what Babyloan did during the six months before its launch, with the Banque de France (central bank of France) and the AMF (French financial markets authority). By the way, we paved and smoothed the way to future French platforms that might emerge…
The platforms also have to make sure, with their MFI partners, that exchange control constraints do not tarnish the models.
Microfinance has just revealed its first youthful mistakes. Unfortunately, it is not illogical that peer-to-peer microcredit does the same. In both cases, it is commendable to discuss the matter in an open and constructive way so that the governance rules of this new activity can be established as soon as possible. There is no reason it should be otherwise.
Aurélie Duthoit et Arnaud Poissonnier (co-founders of Babyloan)
(Translation from fr to eng : Anne-Laure Buisine)
November 23, 2009 at 7:35 am
I am a modest lender @ kiva. The angle you outlined of the way Kiva operates is new to me. I thought, just like many other kiva lenders, that the loans were collected and distributed after 100% was pledged. At the same time I did not think even for a second that the exact same dollars I gave are the dollar that went to the person whom I lent. After all I understood that Kiva is platform where lenders met micro finance operators in different parts of the world.
However the article made me think whether the new light shed made any difference to me. It did not. Why? Because while the dollars went were different I am 100% sure that the dollars that came back did come back only because the exact business to which I lent used the sums it got to get to a point where it was able to proudly pay back a debt. Since I lent and did not donate this result is satisfying enough. There neither is fraud nor miss representation from Kiva, the field partner or the borrower.
I will summarize by stating my conviction that makes me lend and re-lend. “Lending is no charity”. When you lend at 0% it is a low risk gamble you take by judging very many qualities. For me the most important aspect is whether the borrower will be able to repay. So far I have been fairly successful. I am thankful to Kiva that it lets me carry that feeling while also help some entrepreneurs around the world.
November 28, 2009 at 2:11 pm
All online microfinance websites require MFI intermediaries. We pointed this out more than a year ago to the academic community.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1281373
At a presentatoin of Babyloan (a Kiva replica but for-profit) to our students by Arnaud Poissonier, we found him to be more transparent than Kiva was.
Arvind Ashta
Burgundy School of Business, France
November 29, 2009 at 12:23 pm
I have been a Kiva user for 2 years and signed up both my kids as donors last year. While our repayment rate has been acceptable, I started to become suspicious when I wanted to increase my donation, but had a few questions before increasing my donation:
- why were there so few new opportunities to lend but the stats indicated much higher numbers being lent
- why African countries seemed under-represented
The facts didn’t seem to make sense, so I tried to contact Kiva directly with my questions and after about 2 hours of trying via email gave up with their convoluted comment/blog questions. In essence they seemed to be saying just give us the $ and we don’t have to answer your questions.
I became uncomfortable that a charitable organization was not being transparent, so I have moved our funds out to a different org that will be more open.
I am a Wall St Investment Banker and something doesn’t smell right here. Thanks for your work on getting Kiva to be more open as I believe their underlying work is good. I am a Returned Peace Corps Volunteer from Liberia who worked in small enterprise development (1984-86) and saw firsthand the benefits of microlending.
Keep keeping ‘em honest!
DF
December 6, 2009 at 9:57 pm
“I believe their underlying work is good…”
yes… and I wonder if kiva is getting more scrutiny – no objections – for the very reason that it’s web-based, and working in that environment people expect a degree of transparency no one expects if you send money to, say, Heifer Int’l — you don’t expect to see the family that gets the lamb, you trust it happens and well, maybe sometimes it doesnt’ but you never know that. And it only goes bad a few times, and that’s just a normal attrition in work like this. I would hate to see a good thing undermined, but they made their bed on the Net and so through transparency they will have to build their credibility and reprutation more strongly than others.
December 17, 2009 at 8:58 am
The problem of these Internet fundraisers (despite all the positive work they do!!!) is that there are too many barriers between internet investor and micro entrepreneur.
This involves the problems describe above… Lack of control and transparency…
Nowadays the solution is clear but not easy to undertake… These P2P website should be at the same time fundraising over the internet, and microfinance organizations who work directly with micro entrepreneurs or website that work with few fields partners to avoid this king of problem. To me, this is the only way to ensure transparency and provide real proximity between Investors and Microentrepreneurs.
For that reason, we (people from my Microcredit NGO – named IMPULSO in Brazil) decided to launch from march 2010 our website to raise funds connecting “our” micro entrepreneurs with internet financers…
From the website IMPULSO, Financers have access to a full business description, videos and photos of entrepreneur and have the possibility to advice his entrepreneurs on specific problematic that the entrepreneur wants to share.
Transfers of money are made between Financer, IMPULSO and the micro entrepreneur (no other intermediary)…
If you want more info watch our video http://www.youtube.com/watch?v=okJMnIC9R0w and be one of our first investor!!
To know more you can also join our Facebook group. http://www.facebook.com/group.php?gid=157704411874&ref=mf
Cheers,
Guillaume Desclée
January 2, 2010 at 10:32 pm
I just searched the 10 latest loan proposals and all were predisbursed. What makes lending more difficult is having no easy way to find the proposals that aren’t already funded and thus still need money. My search criteria in the last few hours were for most recent, fundraising, female, all sectors, and all regions and I looked at the top 10. If I have to dig through 100 or 1,000 to find a few nonpredisbursed who need the money, maybe that’s a waste of time compared to other ways of giving, other than Kiva. If I apply some criteria and Kiva lends by other criteria, then my dollar-voting is meaningless. Dollar-votingcould be equivalent to voting but only if the intermediaries were using the data to select future proposals; however, nothing I saw suggests the intermediaries get that data or use it. They may be doing excellent work but this isn’t the tool for finding out.
I’d be happier about simply giving a gift to Kiva or many other organizations if they used their volunteers, but most seem to severely limit what their volunteers are allowed to do, which means money isn’t used very efficiently. Lending to end users is a much healthier alternative. Now we have to go somewhere other than Kiva.
I understand how direct mail is written (I’ve published about it), and I see the same thing here. Kiva replies only after the problem becomes a story in the Times which threatens their funding. Another bad symptom. The Kiva site stories are written by intermediaries’ staffers who have less reason to be honest or accurate. This issue leads me to doubt that these are honest descriptions.
I’ve been trying to get Kiva to accept a postal money order, with a margin for their check-handling costs. They say they just tear them up. But they’ll take larger checks than I can afford to send. Something’s wrong there. I don’t think I’m going to help Kiva.
Maybe large organizations in general are the problem: they’re successful and they copy methods that work for other successful groups, and as part of that they lie. Yes, donors request that nonprofits have certain characteristics, but that’s not justification enough.
I’m think I’ll update Wikipedia shortly.
Thanks for the article and inducing Kiva’s reply.
–
Nick
January 4, 2010 at 3:49 am
Question – How does “net billing,” as described in “How Kiva Works,” square with the P2P model. Comments here have focused on the fact that it is not P2P at all because you are doing no more than lending to the MFI and not the borrower you select. Some here have argued, however, that there is still a true P2P component to this arrangement because if the borrower you selected defaults, you lose your money, i.e., you’re effectively refinancing the MFI loan and assuming the MFI’s risk of default. I might be appeased by that but is it even true? My interpretation of Kiva’s short description of “net billing” is that Kiva lenders are repaid not based on whether their borrower made their payment but whether there was a surplus in the periodic reconciliation between Kiva and the MFI. So my question is, if there is a deficit in net accounts with the MFI, yet your chosen borrower is making the repayments, do you get repaid or not? If not, then I’d say the P2P marketing is, sadly, thoroughly misleading.
January 4, 2010 at 9:23 am
Harry, I think your understanding is basically right. It is up to the Kiva partner (microcreditor) to inform Kiva of any missed payments. These are then factored into the net billing. However, as I write in this post, unless the microcreditor is itself going bankrupt, such missed payments are rarely reported, in order to maintain a high official repayment rate on kiva.org. Since I wrote this post, I have come to appreciate better exactly the point you make, which is that regardless of this pre-disbursement business, if all missed payments were passed back to Kiva users, that would be true P2P. The borrower and the lender would be truly linked. But as I say, usually that does not happen.
January 4, 2010 at 1:02 pm
So, since a kiva lender has no connection with the borrower whatsoever, all our loans or donations do is support kiva’s self-appointment as a clearinghouse for MFI’s, a kind of grass roots MFI World Bank, supported by donations of outright gifts or interest free loans. For me, that raises two issues. Why give to Kiva rather than directly to a MFI, particularly if the MFI might offer more of a P2P connection and so make my gift feel more gratifying? Maybe to the extent Kiva monitors its partner MFIs and imposes conditions such as interest rate restrictions as a condition for access to its pot of cash, Kiva still has a valid and worthwhile purpose. It can evaluate MFI performance better than the casual donor. That’s quite important, and I don’t know what other resources are out there with this function.
My more personal issue is the lack of candor. “Net billing” seals the deal in terms of Kiva having no P2P component whatsoever, which means in turn that its marketing pitch of having people actually select borrowers is a complete farce, similar to but less honest than just sending pictures of abused animals. Plus, the notion that people are making “loans” is also a fiction. It is functionally a Ponzi scheme: if there were ever a “run on the bank,” it would be unable to repay more than a small portion of these “loans.” It’s just hype. Maybe it doesn’t lessen Kiva’s value, but it’s offensive to me. If I were unwilling to put the effort into identifying worthy MFIs, I might still use Kiva. But I am motivated by its dishonest approach to do the research, so my money will go elsewhere.
January 24, 2010 at 12:05 am
Thanks for this great article. It actually helps bringing transparency to where it’s going to be needed.