Last post I talked about having mixed feelings about donating money to charity. Society’s prevailing attitude is that giving money is always helpful, and is always motivated by genuine altruism. I’m not so sure about either, and I know I’m not alone.
My suggestion for people who feel that way was to find a cause you can give to with your whole heart, without reservations. I hinted that I had found such a cause to give to, one that doesn’t make me feel condescending, or unsure of whether I’m actually helping.
It actually isn’t a charity. It’s a non-profit that facilitates small loans to small-time entrepreneurs around the world. Teresa needs $750 to properly stock her general store in Paraguay. Sergio, a furniture maker in Mexico, needs $425 to buy a reserve of wood so he can fill more orders.
These are independent entrepreneurs who probably wouldn’t otherwise have had access to any kind of financing. With a small loan, a hardworking individual can get a business off the ground, or help it become profitable.
The organization is called Kiva and I’m sure many of you have heard of it by now. Rather than donating money, you lend. You choose an entrepreneur, read their story and their business goals, and send them a no-interest loan, as little as $25. Nearly 99% of the loans will be repaid to you, usually within a year. You can then use that money to loan to another entrepreneur, donate to Kiva’s operating costs, or even cash it out and walk away with it.
By lending, rather than donating, you can help to create a self-sustaining source of income for these people. It builds economies and empowers people to support themselves, rather than depend on aid.
The three primary values Kiva is trying to promote are:
Dignity — by creating an equal-ground, partnership-type relationship between you and the person you lend to, rather than a downward, benefactor-type relationship. This promotes dignity on both sides.
Accountability — Because repayment is expected, these loans create accountability where a donation would not. Each borrower enters the relationship with the expectation of the recipient becoming self-sustaining financially.
Transparency — Kiva prides itself on being open about its operations and the financial transactions involved in an attempt to avoid some of the cloudiness people perceive in some traditional charitable organizations.
This article was supposed to wrap up around here, with an earnest appeal to lend through Kiva if you are feeling weary or ambivalent about traditional charities. But I did a bit of research, and although Kiva advocates transparency, it might not be quite what it appears at first. I want to make sure all the cards are on the table, so that people can contribute without reservations.
How it Really Works
Most people who lend through Kiva probably believe it works something like this:
1) You browse the site and choose an entrepreneur who wants to start or expand a small business or other project
2) You contribute a portion of the loan they have requested
3) When the total is reached (which happens very quickly considering the small size of the loans), your chosen entrepreneur is granted their loan and may proceed with their business plans
Therefore, you and 10 or 20 other kind lenders have given Geraldo a chance to buy enough seed for the upcoming planting season. This means there is a peer-to-peer connection, where you are able to help a specific person with a specific purpose. You chose Geraldo over others, perhaps because you have an affinity for farming, or because you are endeared by his story, or for some other personal reason.
There may be lenders you chose not to support, for personal reasons. Perhaps you are a vegan, so you’d rather help Luca renovate his clothing store than help Maria buy cows for her small dairy.
This personal connection is something Kiva wants to foster. It’s central to Kiva’s philosophy and it is very appealing to lenders. I like that I was able to help a woman in Nicaragua expand her corner store. I like that I got to choose where my investment went.
But that isn’t quite how Kiva works.
Kiva does not let you lend directly to its entrepreneurs. The loans are disbursed by “field partners,” which are microfinance institutions (MFIs) in the entrepreneur’s country. Kiva allows you to lend your money to the MFI, who loans it to your entrepreneur. This is indicated prominently on Kiva’s site and shouldn’t surprise anyone.
What might be a surprise is that nearly all of the loans have already been disbursed by the time the entrepreneur even appears on Kiva. Often Kiva does not know they exist until the loan is paid out. If you look at almost any entrepreneur’s profile you will see that the loan was “pre-disbursed” before Kiva even posted the entrepreneur’s situation and needs, and asked its users to lend.
Exactly when the loan is made may seem irrelevant, but it brings up a few problems for some people:
- It means you do not actually get to chose who you loan to, though it seems like you do, and for many people this is the reason they use Kiva. You do choose which field partner gets to use your money as capital, but not which business is funded with that money.
- The entrepreneur is represented as being someone in need of a loan, when they are actually somebody who has received a loan and is no longer in need of one. Your money will go into the MFI’s pool of capital, with which they will fund other entrepreneurs and/or pay back Kiva, for not only this loan but other previous loans.
To most people it probably isn’t particularly crucial to know which entrepreneur their loan goes to support, but for some it is. I mentioned vegetarian lenders and meat producers, for example. Others might be concerned that charcoal producers contribute to deforestation, or they might have any other personal or political objection to some of the businesses supported with their investment.
But think about it this way: your contribution probably helps someone — but you don’t know who, only that it is not the person you chose to help. Your contribution does not affect their situation; that entrepreneur has already received their requested loan, and their story and picture is posted on Kiva so that their creditor can recoup it and other loans.
What your loan does do is contribute to the capital of the organization that has already lent to your chosen entrepreneur. For what it’s worth, your loan expands the ability of that organization to help entrepreneurs. It almost certainly does help to improve the quality of life of some entrepreneur and his or her family, as well as strengthen their local economy.
This is a real contribution, and what makes it even more appealing is that you will get your money back 99% of the time. This means two things: you can continue to help others with the same funds, and that you’ve done more than give someone a proverbial fish — you’ve helped somebody to create a business that is able to reproduce that money and more.
So essentially, instead of getting to choose an entrepreneur to help (like I initially believed, and most undoubtedly do) you choose a Microfinance institution to support, and you get to see an example of someone they have helped. That’s a worthy thing to do, but it isn’t quite how Kiva presents itself.
A Point of Interest
It also may surprise you that many of these MFIs are for-profit lenders, and most of them charge interest rates that would be considered outlandish here. They can be as high as 80%, and most are in the 20-40% range.
So this is what actually happens: you lend money to Kiva at zero interest. Kiva lends money to a (carefully screened) MFI of your choosing at zero interest. The MFI lends their capital to individuals who apply for loans, at interest. So essentially you are lending your money to a creditor who can use it as interest-free capital to lend to others at interest.
I’m fine with that. I am not against lending for profit, and this system probably still provides an excellent opportunity for most of the entrepreneurs listed on Kiva, but I suspect the casual Kiva lender believes their interest-free loan is going to the entrepreneur in the picture, and this impression is cultivated on purpose.
Kiva does not exactly lie about how it works. All of this information is available somewhere on their website if you look for it, but I think the idea they present upfront is different than what they are able to deliver.
There is another place where Kiva’s presentation might be misleading. It advertises a 98.9% repayment rate, which suggests an extraordinary success rate among these entrepreneurs: apparently, a whopping 99 out of 100 made enough from their business venture to repay the loan. Though the loans are small, this success rate is extremely unlikely, and we’ll never know the real number. The MFIs repay Kiva for 99% of what Kiva lenders contribute, but these institutions almost certainly would rather eat the odd defaulted loan and repay Kiva, than report a delinquent borrower and stiff Kiva (and you), and consequently lose standing with an extremely important source of capital.
This is the reason most of the lenders charge interest rates that appear outrageous to us — 20-40% is typical. Kiva does disclose that its field partners do charge interest rates in this range. They say, and I believe them, that this is simply the cost of lending money to high-risk people in developing economies. They must charge these rates to cover the entrepreneurs who default on their loans, to pay for their own operating costs, and in the case of most, to make it worth their while.
Why am I telling you this?
This is not a condemnation of Kiva or the idea of microfinance. I am still an enthusiastic supporter of both. Even knowing what I know now, I do recommend lending through Kiva. I will continue to contribute through Kiva, though from now on I’ll base it on what I know about the MFI, and not about any particular entrepreneur.
After learning how it actually worked, I did feel a bit duped. I think they want to push the idea that it is a real peer-to-peer lending situation. They create this impression without being overtly deceptive. All of the information is there, but they know the casual lender won’t look that far.
I’m mentioning all this because I think there is a danger of backlash. Microfinancing is a powerful way to help alleviate poverty, without the pitfalls of short-sighted financial handouts, but I worry that people will dismiss Kiva as a scam when they discover that it doesn’t quite work like it appears to at first glance. To some it’s probably no big deal at all, but to others it is an offensive misrepresentation, and I’d hate Kiva to get a bad rap when they’re doing so much good.
I think the emotional appeal of individual stories and pictures is a tremendous draw for would-be lenders, and Kiva would receive far fewer loans if they did not play up this apparent peer-to-peer connection. But there is no real peer-to-peer connection here. It creates an interesting ends-justifying-means situation: should they play down the peer-to-peer concept so that people don’t get the wrong idea, knowing that it will cost many entrepreneurs a golden opportunity?
I’m not quite sure, but I’m on board either way.
Photo by Mckaysavage