Kiva - Gifting Small Loans to Developing Countries

[Greg Bernhardt]

For a couple years I've been getting gift certs for holidays and I love it. It's a grassroots effort to award small loans to people in developing countries by enabling many internet people to chip in. It's quite a bit of fun to browse and find people worthy of supporting. Anyone else use Kiva? What are your thoughts on the organization?

http://www.kiva.org

 

[Jack21222]

I've never heard of this until now. I wish I had the money to loan out, but I'm in debt up to my eyeballs trying to keep my mortgage while going to school.

One thing that sticks out to me:

"Currently, Kiva Lenders can only receive 0% interest on their loan. Kiva hopes to allow Field Partners to offer non-zero interest rates to Kiva Lenders."

If they were to even offer something like a modest 1 or 2% interest rate, I'll bet they'd see more loans.

 

[Greg Bernhardt]

If they were to even offer something like a modest 1 or 2% interest rate, I'll bet they'd see more loans.

Perhaps they'd have less people asking for loans? Paying back at 2% is still a lot for these people. As it is, it takes me usually 4-5 months to get paid back. Also if you start making money off it there could be more paper work and rules which would complicate things for lenders. Good idea though, I don't know.

 

[zomgwtf]

So all you are effectively doing is loaning money to people around the world who need it and they pay YOU back (not Kiva.org)?

How does Kiva get money in this, surely they don't just depend on advertising?

 

[Greg Bernhardt]

So all you are effectively doing is loaning money to people around the world who need it and they pay YOU back (not Kiva.org)?

How does Kiva get money in this, surely they don't just depend on advertising?

You have the option to donate a % to Kiva. I usually donate 15% which is $3.75 on $25 loan.

 

[ViewsofMars]

Thanks Greg! I know people who have lent money through the Kiva.org. I personally think Kiva.org has extraordinarily moved in a direction that has helped save small businesses. Smithsonian Magazine had a wonderful three page article from 2007, Software engineer Matt Flannery pioneers Internet microloans to the world's poor. Naturally, I'm all for helping those in need. I donate to my time and money to help the poor and encourage others to do so too.

•Young Innovators in the Arts and Sciences•The Last WordMatt Flannery, 30, co-founded the non-profit Kiva.org, a microlending site, in 2004. Kiva operates on a people-to-people model, allowing private individuals to make loans to borrowers seeking to establish small businesses in developing countries.

How does Kiva work?

Kiva connects individual lenders from the developed world to individual borrowers in the developing world. We work with local microfinance institutions that post the loan applications they get on the Internet. Kiva raises debt capital via the Internet from thousands of lenders in the United States and Europe. The partner institutions sort and administer loans, but our lenders actually fund them.

How did you get this idea?

My wife [Jessica, co-founder of Kiva] was consulting in microfinance in East Africa, and I went along on a trip with her. We had the idea together. I thought it would be interesting to give people the chance to participate as partners, not just donors, with [small] businesses in Africa. I've always been interested in ideas about poverty. I've been sponsoring children through my church my whole life. It was part of my upbringing. What we're doing now is an extension of that personal history.

Why loans rather than donations?

Lending to somebody sends the message that you're treating them as an equal, someone who can participate with you in a business relationship. It's a really dignified way to interact with people.
[p.1 of 3]

Read more: http://www.smithsonianmag.com/specialsections/innovators/flannery.html?c=y&page=1#ixzz0jdD1Y5fJ

Matt and his wife are awesome! I think of their organization as a Community Center attempting to bring people from around the world to help each other grow in community spirit.

"Kiva.org of San Francisco, California, USA, is the world’s first person-to-person micro-lending Web site. It empowers people to lend directly to unique, small entrepreneurs in many parts of the world. As we enter the weekend of INDEX:Award 2009 events, Kiva.org will have lent more than US$87 million to developing-world entrepreneurs, micro-finance loans made by some 500,000 online participants, most of whom make loans of $25 at a time."
http://www.indexaward.dk/index.php?...le&id=374:kiva&catid=9:winners-2009&Itemid=20

 

[GeorginaS]

Wow, okay, that's a bit overwhelming. I'd like to loan money to all of them. I hope you don't mind me asking, but how do you, personally, select who you'd like to help out, Greg?

 

[Jack21222]

Paying back at 2% is still a lot for these people.

They're already paying back 20%+! You seem to be under the misapprehension that these entrepreneurs are getting interest-free loans. Look at the "Portfolio Yield" numbers for the lenders.

Kiva uses a calculation called “portfolio yield” to express the average interest rate and fees that Kiva entrepreneurs pay to the Kiva Field Partner administering their loan. Portfolio yield is defined as all interest and fees paid by entrepreneurs to the Field Partner divided by the average portfolio outstanding during any given year.

I will list the first 5 portfolio yields that I see.

22%
19%
31%
53%
42%

Your donations are making these "field partners" a lot of money, but the field partners kick nothing back to you.

 

[Tiger99]

I use Kiva. I like to give to charity, but don't have that much to give, so this is cheaper way. I have about $130 in loans that I re-loan. I'm not entirely sold on the concept but I hope it helps some people.

I also like the website betterplace.org which has the same shopping-type feel, but you actually give the money. Then you can keep up with the projects you donate to. Once I'm a bit more secure financially, I hope to start giving money there again.

 

[zomgwtf]

They're already paying back 20%+! You seem to be under the misapprehension that these entrepreneurs are getting interest-free loans. Look at the "Portfolio Yield" numbers for the lenders.

Isn't that only for the 'outstanding' monies owed?

I think that this Kiva idea sounds pretty cool, it's a shame I don't have spare money I could lend though. Once I get back on my feet thought I'll be sure to give this site another visit.

 

[Jack21222]

Isn't that only for the 'outstanding' monies owed?

According to the quote I posted from their website, that is the interest and fees the entrepreneurs pay to the "field partners."

Kiva looks like a way for these "field partners" to make money, while the "lenders" (meaning us) get to absorb all of the risk.

 

[Borek]

Portfolio yield is defined as all interest and fees paid by entrepreneurs to the Field Partner divided by the average portfolio outstanding during any given year.

Can't say I uderstand what it means.

 

[Jack21222]

Can't say I uderstand what it means.

The "entrepreneurs" are the people that actually receive the loans. The field partners are the ones that physically give out the money. "Lenders" are us. The field partners loan money to entrepreneurs and charge them fees and interest. The field partners then turn to the lenders to back up their loans.

Portfolio yield is the amount of fees and interest paid by all entrepreneurs to that field partner divided by the average amount they have loaned out.

These people are making 20% interest on our money, and assuming none of the risk. Meanwhile, we get none of the reward.

Sounds like a scam to me, unless somebody can convince me otherwise.

 

[Borek]

Thanks, my English sometimes fails when dealing with vocabulary I don't use frequently.

Browsing kiva site I found this page:

Why are your Field Partners' interest rates so high?

I have no definitive opinion here, but I am sure that my intuitive evaluation is skewed by the fact that I have several banks that I can reach in less then 10 minutes and I can ask for a loan just calling them or mailing. That's not the case in the rural areas where these people work, so could be 20% interest just covers the cost of operations.

 

[Jack21222]

That's not the case in the rural areas where these people work, so could be 20% interest just covers the cost of operations.

I was being generous with that 20%. According to that link you posted, the average is 36%. Kiva claims that only covers costs, but I can't help but think that the field partners are the real winners.

 

[TMFKAN64]

It always struck me that the point of Kiva is to encourage the development of a financial infrastructure in the developing world. As a lender, you are assisting *both* the field partner and the person receiving the loan.

My wife and I have thought about whether the cost to the borrowers is too high... but I think we've come to the conclusion that the loans are typically very short term, and will no doubt benefit the borrowers despite what to us seems like an exhorbitant interest rate.

 

[GeorginaS]

Thank you for pointing out that wrinkle, Jack. And I do perceive it as a wrinkle. I'll have to read the site more carefully, now, rather than just get involved with the emotional appeal of wanting to help out people who can otherwise put themselves on their own feet if given a bit of capital to work with. I'm all in favour of the concept. Teach a man to fish and all of that.

However, lining some third party's pocket to the tune of 20 to 36 points doesn't appeal to me. I'm trying to feature what admin costs they have that warrant that. As I said, I'll read more closely, because they ought to be transparent about the costs involved. I understand that it does cost money to run some of these organisations, but the vast percentage of what people are giving ought to profit the people who most need it. I'll gladly give out zero point loans, not if someone else is profiting from them, though.

Edited part:

This is from the website:

6. Why are microcredit interest rates so high?

The nature of microcredit – small loans – is such that interest rates need to be high to return the cost of the loan.
"There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.

The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can't be cut below certain minimums." (CGAP)

http://www.kiva.org/about/microfinance"

Now I'm more curious. I'm assuming that if someone defaults on my $25.00 loan, I lose it. I don't see anywhere, nor do I anticipate, that any sort of collection proceedings would follow from a defaulted loan, nor do I see any guarantees on the return of my initial investment. So, I guess I'm not clear on what their built-in cost of default represents in terms of disbursing microloans.

Also, from the top of the same page, it appears that the money lent by online lenders is supplied to local banks and/or lending institutions. Okay, so, they're willing to provide small, unsecured loans to the local population, but they're not providing a return to the people providing them with the capital in the first place. (Not that I'd want a return, because I wouldn't. The point would be to a) get money into the hands of people who can put it to use for local industry and b) it has to be a loan to add dignity and a sense of accomplishment rather than a handout. Which is great. But if I'm not attaching interest to it -- and, as I said, I don't want to -- just give me the principal back -- I'm not clear on the charges involved with the local institutions.

Maybe Greg or someone who's been more involved with this can explain it more clearly to me. Their website isn't helping.

 

[GeorginaS]

I was going to edit again, but it would make that post too long and unwieldy.

I knew that Clinton was involved with a microloan worldwide project and searched that. It brought me back to Kiva.

http://www.kiva.org/press"

So here's their press page. I doubt that, if there was anything really questionable going on, that it would make it past this many corporate and news sponsors. Would it? Is it safe for me to assume that these people would have properly vetted the organisation?

 

[hypatia]

Personally, I don't see why a company that has made $11 million dollars, off of poor people, needs more free money from me.

 

[GeorginaS]

Personally, I don't see why a company that has made $11 million dollars, off of poor people, needs more free money from me.

Phew, okay, where's that, Hypatia?

 

[Jack21222]

Does this thread really need to be stickied?

 

[Borek]

Obviously Greg thinks it needs to be stickied. And I must say - while I have my doubts - I like the idea and I am thinking about putting few bucks in. Not for the profit.

 

[hypatia]

Georgina, it was some bad math on my behalf. They hope to reach the 100 million dollar mark this year, at 20 % interest.

It is the perception that Kiva is lending money to people who need help, much like Save the Children{see the photo of the person YOU are helping P2P scam}. The truth is money is not matched to specific borrowers, but are pooled and provided to micro-finance intermediaries. Once the money leaves the USA, who tracks it? How can you prove to me that the money went to Yim's fruit market, and not for some other use{drugs, prostitution, guns}? Who is accounting for where the money really goes?

Would I love to live in a world where unquestioning charity/non-profit thrives? Yes, but in reality, I don't. I also believe their marketing warrants a formal investigation.

 

[hypatia]

Obviously Greg thinks it needs to be stickied. And I must say - while I have my doubts - I like the idea and I am thinking about putting few bucks in. Not for the profit.

You should also look into how easy it is to back out of the program, once you join.

 

[hypatia]

opps edit

 

[zomgwtf]

After looking further into this I do not think that this is helping ANYONE who needs help out. It makes it appear as though you are donating money to poor Hassan who needs money to buy a refrigerator for his restaurant:
http://www.kiva.org/lend/182857?_tpos=2&_tpg=1
And the field partner (I assume) writes a pretty touching description of Hassan and his life. They make it look like if you donate money it'll go towards loaning him a part of his $1,675 loan.

REALLY what you are doing is paying the loan company on his behalf... in full! The microloan agent has already given Hassan his loan and the money they collect from Kiva is JUST FOR THEM. None of your money goes to Hassan, or even to help any other person, and the microloan company didn't really need that money to make a loan to him, they have already MADE the loan... They keep that money as 'backfill' aka you have just paid Hasans loan and when he pays the loan partner back with interest they inform Kiva and Kiva pays back the lenders.

The only people getting help here are the partners, they are giving out RISK FREE (for themselves..) loans. If Hasan decides not to pay then the loan partner has lost $0 because it's already been paid for from Kiva funds, they just possibly lose out on the profits. You however get none of your money back. This seems like a freaking criminal organization to me...

I wish I could operate such a partnership here in Canada... I could make millions off it from the looks of it. Just loan out all my money and fundraise the money 'in loans' from people over the internet. (telling the people that the loans are FOR the actually person I had already loaned money, in reality it all goes into my pocket... and I can loan it out also now) Now I'm back at my original amount of money I started with! If the people pay me back then I pay back the lenders and now I have gained MORE money... 20% INTEREST! WOW! If they don't pay me back then I just explain to the people that this person is not paying be back and KEEP THEIR MONEY UNTIL I COLLECT THE FUNDS! Meanwhile I can use their funds to loan MORE money and now I'm stuck in a perpetual money making system. The more money I loan the more I potentially make with assuming 0 risk! This is bloody brilliant!

EDIT: I just noticed that this thread is no longer stickied?

 

[GeorginaS]

Obviously Greg thinks it needs to be stickied. And I must say - while I have my doubts - I like the idea and I am thinking about putting few bucks in. Not for the profit.

You, as the initial lender, Borek, don't receive a profit at all. The intent is that you get your $25.00 repaid without interest. What we're exploring is the possibility that other people are earning interest off of your money and you're just trying to help out small entrepreneurs.

There's an interesting article and subsequent discussion on this page at Kiva's site.

http://fellowsblog.kiva.org/2010/01/07/bad-roads-interest-rates-and-mfi-sustainability/"

There are certainly valid arguments on both sides. Some people are disillusioned because they feel duped thinking they were providing interest-free loans. Other people are okay with the rationale that micro-loans are expensive to do (and that's certainly true of lending institutions here -- they'd as soon lend you hundreds of thousands of dollars rather than hundreds because the effort and overhead involved is the same) and the local institutions who are administering the are also employing local people. And some people can't easily reach their lending institution so the loans representative comes to them, and in a lot of places, the person travels out weekly. And that improves repayment. I understand that too. It's easier to come up with $5.00 a week than $20.00 a month.

36% sounds like a lot of interest (the percentage is certainly high) but if it's a $100.00 loan over six months, that's, what? $18.00? Is that a whole bunch of money to ask for someone to drive out to see you, sign up the paperwork, keep track of your repayments, drive out every week (and we're not talking across town in some places, here) to see you so you can make a payment? Doesn't seem that way.

And, no, most established financial institutions have no interest whatsoever in these types of loans. These people wouldn't ever have access to this kind of opportunity.

Then other people argue that they'd gladly have the admin fees tacked onto their loan amount rather than have interest charged to the borrower. Then other people argue that the local small lender (MIF) needs to learn to be a sustainable business interest too. If they know how to control their costs and maintain a working business and employ local people, they'll become self-sustaining too and continue to (in principle) support the local economy but on their own initiative.

The arguments are decent ones.

It seems that most people seem upset because they thought that they were specifically loaning Asbar money with which to purchase a goat when in fact they're funding a local lender who in turn loans to Asbar or someone else. That's what seems to be upsetting most of the people who posted in the very lucid discussion.

 

[Borek]

I know. I was aiming at the fact that I believe low level help (as in microfinancing addressed to Mngh-In-Need, Lower Backwater near Kzdupu) makes sense and I am ready and can afford to participate. And I don't know if Kiva is OK or not, but I don't know of any other type of organization involved and offering better approach. At least Kiva does it for several years and its HQ is civilized, democratic country (unless I am missing something important about California).

Which doesn't mean much, but it is better than nothing.

 

[GeorginaS]

I'm glad Greg posted this because it's an interesting area to explore. I've had this discussion with people I know who've been upset when they find out that charities such as The Food Bank have paid employees and admin costs. Not everything is donating. They need to pay for space to operate, even it the space is deeply discounted. Some people are volunteers but an organisation that large needs full-time people, who have expertise in running such a large organisation, working to make it happen. Who can afford to do that, full time, strictly as a volunteer? But wow people get upset.

My father gets upset at charities such as the Christmas Bureau because, according to him, there used to be a time when there was "one widow with a couple a kids" in a city. (Which, right, okay.) And some local interests would donate a few toys and put together a food hamper for said widow and a good thing was done. He refuses to believe or understand that there is need greater than "one widow with kids" per city at Christmas time.

I'm sorry this thread got derailed a bit, Greg, but it's interesting and fascinating and enlightening to be able to take a look at a charitable organisation with other people who can examine it dispassionately. As best as I can tell, Kiva appears to be doing a good thing. I admit to being a bit irked, initially, at the presentation that doesn't really represent what they're doing. Although I understand that marketing appeal. Help this lady with her weaving business as opposed to support a local lender to loan money to this lady with her weaving business. The human face and real story makes the enterprise more tangible and easy to understand.

Something I'm reading recently talks about how charities appeal that way by presenting one person to you, because people can relate to one person and that level of need and envision how they can help. If you present it as millions of people are starving, then the numbers become overwhelming, the problem becomes too immense to even try to help, plus, there's no human face on the problem. There's a number.

Anyway, so far, it sounds good.