Kiva: The End of a Love Affair

I started participating in microlending through Kiva about 20 months ago, and have cycled my $225 through 28 loans so far. Actually, it’s down to $212.50 because a bunch of borrowers in Ecuador defaulted after an earthquake, and the one I was in on had only repaid half, hence the odd amount. For those who don’t know, Kiva is essentially a way to provide microlending institutions (which sound like credit unions, Third-World style) with free capital, and you get to choose exactly who you lend to. You do it in $25 chunks with other lenders until the loan is funded. You get no interest on your funds, Kiva takes nothing, and the local microlending institution charges a massively lower interest rate than the borrowers qualify for elsewhere – meaning they can’t get a loan from a “normal” bank and can only get one from, well, their societal equivalent of a loanshark. In essence, we are capitalizing these microlenders/credit unions.

Last month, Kiva piloted a “microlending” program right here in the USA (I use quotes there because I don’t consider a $10K loan to be micro). A lot of Kiva lenders have expressed vehement disapproval on the basis that it draws available funds away from the developing world. But I object for a number of other reasons…

The Interest Rate
I had a look at the website of one of the U.S. microlending organizations that Kiva deals with, Accion USA, and their loans are made at interest rates between 8% and 15% (closing costs of 3-5% are waived for Kiva loans, it bothers me that they apply to any socially conscious loans. Or any loans at all, really). Kiva considers the comparison base – typically the only alternative, according to Kiva’s website – as 127%. I’m guessing that figure is based on a payday loan? What I’d like to know is how accurate this is as a basis for comparison, especially since none of these people even draw a paycheck to link a loan to. Is it really the only viable alternative? If so, that’s not someone who should be getting ANY kind of loan. Many of the borrowers sound like they have access to credit cards (heck, some even own their own homes – I don’t!), which, as much as they would like to, don’t charge anywhere near 127%. Heck, until a few months ago, it was practically in the Bill of Rights that we are entitled to credit cards with limits equal to our gross salaries. In triplicate. Sorry – off on a tangent. My point is that I have very serious doubts that a 127% loan is the only option for any of these folks, and it casts a lot of doubt in my mind over Kiva’s statistics for all the other countries.

I’m already capitalizing plenty American banks with my taxes…
…why would I want to do it with my real money? Our money is lent through a bank that gets all the interest while not sharing one tiny bit in the liability. In other words, it’s kind of like a high-risk/no-return savings account. I inherently don’t trust Americans who can’t plan for an annual car insurance bill that they know about all year long, or who left a professional job without enough in savings (and really, we’re not talking a whole lot by our standards) to get a new biz off the ground. Despite the current credit crisis, I just don’t think most Americans take debt seriously after decades of easy credit and cheap tranfers/refi’s — I opted not to participate in things like Prosper (p2p lending for profit) because I really didn’t like the delinquency and default rates, even for people rated as low-risk. I think folks in the developing world have a much greater appreciation for the loans and programs that microlenders offer.

I would much rather put food on someone’s table…
…than gas in someone’s financed car, or premium channels on their cable package. I believe this falls under “Return On Investment”, meaning that at a lower level, my free capital achieves a great impact in terms of how the income from the improved business is used. That’s not saying there aren’t low-quality loans in other countries — you wouldn’t catch me funding a Lebanese man’s wedding (sorry, no link, I stumbled across it over a year ago but it really stuck in my memory) — but in the vast majority of cases, the money is life-changing.

Of course, the beauty of Kiva is that you only fund the requests that you want to, so it’s not like I have to invest in a US-based “entrepreneur”. However, I still can’t get over the implication that Kiva lenders would be investing their free capital in people whose credit is so bad that their only alternative is, on average, a 127% loan.  That’s either a terrible gamble or an inflated and misleading figure.

Please, Kiva, go back to your original mission of alleviating poverty. Having to rent a shed instead of owning one outright for $10K is not a hardship by anyone’s definition – especially when there are people out there just trying to maintain a $6/day income.

9 Responses

  1. I’m completely in agreement with this post. I would rather gift than lend in general, so I devote some of my giving-dollars to the Heifer Project. Their mission is to help 3rd world communities develop and sustain micro-agri-businesses and water projects. check it out…

  2. I used to work with Habitat for Humanity and our families had to have good credit. But none of them qualified for a standard loan simply based on their incomes. I assume this is the same model that Kiva is using to help people start businesses. So I don’t know that it’s safe to assume they can’t go to a regular bank because they have bad credit. It might be because they don’t have enough income to qualify for a standard loan.

    But the interest rate bugs me. Profiting off the poor is the calling card of our current economic system, no doubt. I hate to see Kiva jumping on that bandwagon. The rates they quote are too high for the uber poor. I don’t give a crap what the current going rate is (I’ve heard the 127% figure before).

    I’m all about multiple economic systems coexisting. But this rubs me the wrong way. Why overcharge just because other folks are being utterly douchetastic about it?

  3. – It is a misconception that capital is readily available in the United States. Even before the recession, an estimated 10 million U.S. microenterprises could not access bank credit to grow their businesses.

    o Loan requests too small
    o Length of time in business too short
    o Type of businesses too risky for banks to consider (such as home based businesses, retail sales)
    o Credit is not sufficient for bank lending standards

    – I encourage those who are not fully convinced that investing in U.S. entrepreneurs is a worthy cause to become educated about domestic microfinance, its impact on each individual borrower, and its cumulative impact in the community.

    • Wait – I don’t think that American entrepreneurs aren’t deserving of small business loans. Heck, I’m self-employed! But these Kiva USA loans look more like the charitable financing of a dream that someone didn’t think all the way through.

      Plus, having looked at Accion’s website (one of the lending partners), I’m more than a little disgusted that they charge closing fees of 3-5%. They waive it for Kiva loans (how nice), but seriously, why would they need to charge any of their clients both interest AND a percentage? Either there’s a high default rate or they’re making a bigger profit than someone doing a socially conscious favor should. I wouldn’t take a risk that it was the default rate.

      Maybe I’ve just known too many pipe-dreamers.

  4. I agree with you, this seems contrary to Kiva’s original mission of microloans in the developing world. There are alternatives in the US for people and small businesses, prosper and Lending Club come to mind. Plus with LC I get paid the interest on my loan, just today I helped fund a loan for a small business to expand.

  5. I always thought that Kiva had a great mission, but reading your post made me rethink some of the aspects of their practices. Very interesting!

  6. Hi Kate,

    I work at ACCION USA, and I’d like to give you some information about AUSA and our partnership with Kiva. We are a nonprofit small business lender that offers an alternative to commercial banking and government services. We charge interest rates far more reasonable than those available to most low and moderate income small business owners—our target lending base.

    Qualifying for loans from government run community lenders (Small Business Associations) is notoriously difficult. SBA loans have rigorous standards and limited availability. We have comparatively lenient credit requirements and try to ensure a fair lending process for our clients and applicants. We do not lend to people whose personal financial history suggests that the additional burden of an AUSA loan might damage their credit.

    Application for a loan is without charge and we offer many free financial education resources. Our fixed interest rates vary from 8-15%; far lower and more predictable than rates on credit cards. Compared to Microfinance Institutions (MFIs) overseas, we loan at a discount—foreign MFIs often charge interest rates in excess of 30%! We don’t penalize for early repayment, so loans are effectively available at much lower interest rates than the terms specify. Closing fees exist to ensure that we realize some revenue when a borrower repays ahead of time.

    On a gut level, I understand that domestic microlending may seem to steal the thunder (and more importantly the money) from microfinance operations abroad, however, as Kiva has proven, this is not the case. They recently authored a beautiful post summarizing the conclusions they drew from their domestic lending experience thus far.

    I can’t vouch for the statement that the only alternative available is a loan at 127% interest, but I can confirm that few alternatives exists. Payday loans (which often charge 300-400% interest) are a common resource for low income individuals. I also can’t tell you that the ROI is higher in the United States. However, consider the situation of recent immigrants or manual laborers aspiring to run their own business. These people not only deserve credit; funding their microenterprises is socially valuable, encouraging creativity, competition, and creating jobs.

    ACCION USA is not your traditional bank—we are adequately capitalized and have never issued a subprime mortgage! More importantly, we maintain open channels of communication with our clients and retain direct financial responsibility for the loans we disburse. If anything, the rest of the financial industry could take a page out of our book.

    If you’re interested in learning more about domestic microlending and AUSA, you should appreciate a number of reports that we have produced documenting the impact of AUSA.

    I’d love to talk more with you about AUSA and domestic microfinance since you are genuinely committed to social justice and seem to lead a fascinating life! In fact, from what I read on your website, I’d encourage you to contact us about a loan if your business ever needs financing! You can reach out to me at loans accionusa dot org. You can also keep track of AUSA through our blog or via twitter (@ACCION_USA). And check out #mifimon (Microfinance Monday) on Twitter/ Facebook to join a real-time conversation along with other microfinance experts and enthusiasts. Thanks for the interest!

  7. Look at the Kiva average. It;’s not 10%. It’s more like 35%. When Kiva gets a cut, how can one call it a charitable organization?

    How can it be that the repayment rate is 98%? It’s not even that here with real low-interest loans. Given the laws on third-world nations, you have to wonder about that figure. Either it’s not true, or something’s just not right.

    • I am from Brazil – middle-class, retired from public service and grateful I never lived through poverty. But real poverty here is never far away from you, be it at slums in the periphery of cities, homeless migrants right under your nose in your own middle-class neighborhood, or at remote rural areas.

      One well known fact here, though, is that poor people are excellent payers – businesses who sell small home appliances at scorching interest rates to minimal wage buyers (US$ 275 a month income) know that, as well as speculators who split their land in tiny allotments to sell as popular housing areas. These people won’t get any other chance, and they value it enormously. So 98% repayment is probably true, but that number will get down as the numbers of middle class Americans posing as impoverished grow in Kiva. Sad. See ACCION USA, for example – their delinquency rate is 3.22%.

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