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The Straight Dope on Kiva

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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

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Jo Richards December 29, 2010 at 2:17 am

Thank you David for the practical and realistic way you presented this important topic, making it almost irresistible to anyone who sits on the fence about giving. The element of ‘dignity’ in giving resonates with me very much and I will be sharing this with my readers and anyone who cares to know. Looking forward to reading and learning more from you – Jo

Lydia December 29, 2010 at 7:08 am

That’s kind of disappointing.

From a business perspective I understand why it’s been set up that way but it still seems like false advertising to post pictures and stories of people whose loans have already been secured (and who may possibly even be paying them back?) in order to convince us to lend money. I know several people who have donated to Kiva in large part because they felt a personal connection to one of the small businesspeople they read about there.

It would make more sense if they posted success stories instead.

dlouhovlaska December 29, 2010 at 7:24 am

I thank you for a very insightful and comprehensible article; now I understand the roots of this interesting and inspirational project.

Nate St. Pierre December 29, 2010 at 9:23 am

This is the kind of critical thinking and investigation I love . . . you’re a man after my own heart, my friend.

I’m on board either way as well. Thanks for the info, David!

Sewahio:wan May 31, 2013 at 8:57 am

Like your response even these years later!

Tim December 29, 2010 at 12:11 pm

What a thought provoking article! I have been a fan of Kiva for awhile, but now I am conflicted.

I already understood that the field partners charge interest. I accept that this is necessary. In reading about them settling defaulted loans though, I really think that I would like to know more about their collection practices. In developed countries, debt collection can be annoying, but ultimately we don’t have debtors’ prisons and bankruptcy is an option.

I think of Kiva as charity more than an investment. Accordingly I would not want to see a well-intentioned, third-world entrepreneur get stuck in a cycle of high interest debt, because their venture didn’t flourish. This seems especially likely since so many of the projects are agricultural.

I guess the bottom line for me is that Kiva’s field partners should make a reasonable effort to collect on the debt, but have a liberal, compassionate write-off policy. I don’t want a debt collector harassing someone on my behalf if the enterprise doesn’t work out. I would rather take the loss, so long as the entrepreneur put forth an effort.

David December 29, 2010 at 6:40 pm

I suppose we can never really know exactly what effect we’re having. Kiva does screen its affiliate lenders, and it gives them a trust rating for the user to consider. Users can do their own research on the organization they are lending to. I suppose it is always going to come down to what responsibility we take for knowing what effect our contributions could have.

michi December 29, 2010 at 12:40 pm

I too had done some research on Kiva a while ago, and other similar microfinanciers.

Other factors contributing to the high interest rates:
– The risk of currency fluxation
– The MFI has to be a bank, essentially, in these remote villages, and has some overhead
– They also have to act as the source of threat for when loans are not repaid (staffing intimidating people to ensure repayments, etc).

That said, clearly people think the rates are worth it, because they continue to take out these loans. It’s better than other alternatives available.

Some of the microlenders in India, for example, state they are directed only to female entreprenuers, though in fact often the women is doing it for her husband’s company, or doing it so she can send her kids to school (instead of actually starting a company/small shop/whatever). So, that’s fine.

I have enough friends who live/have lived in various depressed parts of the world that I may begin my own microfinancing enterprise, using the strength of friendships to secure the loans (at more reasonable rates) rather than having to employ strongarms. We’ll see, we’ll see.

I agree that the surface-level deception on who gets the money is disappointing — though probably necessary.

Brian Reed April 20, 2013 at 9:57 am

I am looking foe people that have started a micro finance company. Did you ever start one?

Char (PSI Tutor:Mentor) December 29, 2010 at 2:45 pm

Thanks David~ I have been considering Kiva~ it concerns me about the high interest rate for the entrepreneur~ as some of them put up their beds or sewing machines as collateral.

Have seen on a doco one man who does not charge interest, I will see if I can find more out about him.

I really like the idea of MF and do it when I can with friends and family, though no interest payback and sometimes part cash part trade, or all trade.

Steven December 29, 2010 at 4:41 pm

A lot of recent research challenges the notion that microfinance is an effective tool for alleviating poverty (Google “does microfinance work”). Indeed, the poor manage to pay back their loans, due to a unique peer pressure model that holds entire “lending circles” responsible for one another’s debts. But studies show that borrowers are not, for the most part, building successful businesses as many inherently believe.

Microfinance rests on the assumption that the poor are natural, gifted business owners lacking only capital. However, having toured several poor countries and visited several microfinance institutions, it’s clear that the poor need many things to be successful; perhaps, most importantly, business skills and financial literacy training.

Unfortunately, most MFIs only lend money and leave it to the poor to figure out how to manage the money and run a business, neither of which are natural skills. This tendency led to the recent microfinance/suicide crisis in India where many borrowers became overindebted and unable to pay back their loans.

Moreover, research shows that most microloans do not actually fund businesses. Rather, they are used for emergencies, smoothing out cash flow shortages, and purchasing household goods, which debunks the notion that MFIs primarily foster entrepreneurship.

Though the KIVA story tugs at the heart, it rests on a false premise. People need more than loans to build and scale businesses, and the future of poverty alleviation through entrepreneurship must embrace a more holistic model if we really want to alleviate global poverty.

David December 29, 2010 at 6:56 pm

With microfinance, I’ve read convincing arguments on both sides. I’m sure there are good and bad instances.

My main issue with charity has always been that we do it for emotional reasons, and not pragmatic reasons, which is why I wish Kiva didn’t depend on the “heartstring” model for its funding. But to give pragmatically means we need to have all the information, and we rarely do. In the mean time, I don’t want to dismiss microfinance, or kiva. If it’s not the right thing, it might be an intermediate step toward a more reliably helpful model.

michi January 1, 2011 at 10:25 pm

I think that sometimes giving someone a loan so they can smooth out cash flow shortages and purchase basic household goods is not altogether bad. Getting one’s head above water financially is of course not the same as starting a business, but need is need.

One could debate where the financial need/benefit is greater, I suppose.

Helen January 27, 2011 at 5:29 pm

This seems as good a place as any to point out that many charities with broader interests such as the Red Cross/Crescent and Care International also run microloan schemes.

Angus December 30, 2010 at 8:43 am

Thanks David, for doing this research. And also, Happy New Year and may you continue your excellent writing.


Angus December 31, 2010 at 10:14 am
Murali January 4, 2011 at 9:53 am

Unfortunately, this happens a lot in India. Given all this, I have resorted to lending directly to people in India. Of course, not everybody has that option, but I am not quite sure what the solution to this problem is also.

Nea | Self Improvement Saga January 1, 2011 at 2:10 pm

Hi David. I have so many mixed feelings about Kiva. I’m strongly opposed to unethical behavior because I believe it does more harm than good in the end.

Since learning about Kiva, I wondered about the “middle men.” I wondered how they treat people who can’t pay back their loans or the high interest rates that they are charged. I wondered if I’d simply be supporting putting someone in debt and helping the “middle men” to have fatter pockets.

Something inside held me back from giving to this organization. The deception element always seemed so wrong to me. I even felt that the pictures and stories may be a big fat lie, a way to make things seem like something they are not. I know this isn’t a very positive way of looking at things, but it is just a strong gut feeling that I have. Months ago, I decided against giving to Kiva. I saw many people giving to Kiva and I gave thanks for them as I choose to go a different route. I’m a giver, but I just felt pulled away from this cause.

I commend you for analyzing the facts and still giving to Kiva. Its is important that we make informed decisions and then follow the course that feels right to us. When you reach out with the intention of helping others, no matter the cause, great Karma is yours.

Happy New Year

G January 7, 2011 at 12:27 pm

I think lending for profit is obviously socially corrosive. And it means that the world’s total debt becomes greater than the total money-supply. This could be manageable were it not for the fact that most of the world’s money is presently created with debt already attached, i.e. when banks grant mortgages and create credit from nothing. Lending for profit is the purest manifestation of social injustice (the rich get richer…) and making money merely from having money leads to economic chaos – booms and busts – because there’s a ‘tail-wags-the-dog’ effect where the value of abstractions such as ‘stock value’ determines, say, how much flour is produced instead of it being determined by pragmatic realities like the state of wheat crops and how many hungry mouths there are.

In all this there seems to be a superstitious faith in the power of the entrepreneur. But historically they do socially bad things as well as good – some of the most successful entreprenurs ever were arms-dealers. Competitive economics obviously sow division but we deny the obvious because we associate collectivism with the USSR and all its horror-stories.

I think what we are scared of now is real, ardent idealism – we think everything can be fixed with a tweak, and leave social and moral philosophising to cloistered beardies. But real, ardent idealism doesn’t necessarily turn out like the USSR or Nazi Germany. Those were wrong answers, and apathetic acceptance of the capitalist status-quo is another wrong answer. I don’t know whether Kiva does more good than harm, but I think it might be a distraction from the actual transformation that could lead to a stable and just society where people do not have to get a loan to buy crap to sell to tourists just so they can eat.

Murali January 15, 2011 at 1:26 pm

Just in case you haven’t read this Opinion piece http://www.nytimes.com/2011/01/15/opinion/15yunus.html?_r=1&hp

Lee January 20, 2011 at 12:22 pm

Interesting article. Have you considered lending to “Energy In Common”? http://energyincommon.org/

Their loans are truly “person-to-person” so they take a little longer to be implemented and repaid, but you know exactly where your money is going! Also, all the loans are for green energy products, which I really like.

If you just want to try it out for little risk, you can lend $5 for a nanoloan (small loan that will be paid back in around 2 months). I had several loans that were repaid last year and it was great being able to lend the money again so quickly.

Shanna Mann January 27, 2011 at 3:59 pm

I actually did the same research you did (because I thought Kiva had to be making a profit somehow) and came away with a different interpretation of the facts.

The MFIs have limited resources, as evidenced by the nightmarish interests rates they are forced to charge (most are non-profits, btw). With the backing of Kiva, they are able to preemptively issue loans out of their operating capital to the individuals they feel are a good risk. They send news of the loan to Kiva, who takes up a collection to “repay” the MFI’s operating capital.

I don’t really see this as a “Your money doesn’t make it where you intended it to go” sort of thing. To me, that’s like feeling ripped off that the EXACT COINS i dropped in the salvation army barrel at Christmas make it to needy families. Of course they don’t. They wind up in a bank somewhere. But people still get money. *magical* isn’t it?

David January 28, 2011 at 5:40 pm

It does depend on how you look at it but I don’t think it’s quite the same as insisting that your exact coins go to needy families. Kiva encourages people to donate on the basis that a particular entrepreneur is in need of help, and is currently seeking loans from Kiva users. The inference we are supposed to make is that their enterprise depends on whether they receive enough contributions from Kiva users, when in fact they have received their loan and that will not change even if Kiva doesn’t receive another dollar. So that means Kiva lenders are enabling the MFI to make future loans to other entrepreneurs by repaying Kiva faithfully, but the bottom line is this: the entrepreneur pictured in the profile in no way depends on the assistance of the person who is lending because they are intrigued or moved by that profile, yet Kiva uses this peer-to-peer concept to generate loans.

Nestor February 12, 2011 at 8:32 am

Interesting and enlightening.

Damn, now I realize if I just leave it at that I sound like one of those empty praise comment spam bots…

Well, currently I’m more of a candidate for receiving charity than otherwise, so I’ll keep this in mind for when I’m back in the black

Louie Helm February 22, 2011 at 12:51 am

If you had written this article back in 2008 when all the topics you mention were legitimate concerns, I’d understand your quibble. But this is just recycling those concerns while failing to notice that they have all been addressed by changes to Kiva’s site… or in some cases, noticing that they have been addressed, but raising them again anyway while still claiming it’s a problem for some reason even though all the info is on the website?? What more were you hoping they do?

I don’t get the point. Why complain about a site you claim to support in a non-constructive way about problems that have already been fixed? How many times do you expect Kiva to mention the back-fill dates, interest rates, and field partner names on their loan requests? I see all that information just fine when they list it once, directly on the loan requests. What *specific* thing could Kiva change on a *specific* page of their site to improve it? If you have any constructive ideas that would help the site, I’d be happy to help you get them implemented.

David February 22, 2011 at 6:51 am

I’m just writing how I feel about it, and the problem I’m referring to was not “fixed” when I wrote this post. The interest rate for a given loan certainly wasn’t disclosed, and I don’t think it is today. Again, I’m not attaching a “good” or “bad” tag to it, just explaining my ambivalence. Obviously you have a different opinion, that’s fantastic.

Ben May 25, 2011 at 11:40 pm

Well now that I’ve made one comment in the past, it’s easier to continue. I spent some time reading about philanthropy in Africa, because that seems that a big spot where my money can make the greatest impact. Here are a few good books about the situation:

The End of Poverty by Jeffrey Sachs
The White Man’s Burden by William Easterly
The Bottom Billion by Paul Collier

They not only cover the question about aid efficacy, but also related international affairs issues. For example, why are some nations rapidly developing while others are stuck in a cycle of poverty? What strategies can best help break this cycle? What organizations are doing the best work on this?

These books also act as a microcosm for philanthropy in general. Some people are saying that we are experiencing a resurgence in the culture of philanthropy unseen since the age of Carnegie and Rockefeller. Some of the new themes include more accountability and a better understanding of the behavior economics of the giver and recipient. (In one study regarding malaria bed nets, they discovered that by making the recipients pay a partial amount, they got better participation in the program than if they had just given them away.) The TED conference is a good example. (If you haven’t been to ted.com, go there right now.)

Linda Jo Martin November 9, 2012 at 11:53 pm

I’m one of those vegan lenders who carefully chose a farmer or clothing seller, to avoid supporting industries I didn’t like. I’m disappointed that my money isn’t going where I thought it was, and so sorry these poor people are having to pay such high interest rates.

Lyn hotchin May 30, 2013 at 11:45 pm

We have what I think is a great way of lending in the rural area we work in , in Cambodia. We raise a donation to set up a “group of farmers in need”.
That donation buys 30 ducks or chickens, a fenced in area to run the stock and food for the stock for 5 months.
At the end of that period, 30 of the bred stock are given to the next farmer in the group. On it goes, progressively , until the group are set up. They each help each other and it progresses. After 12 months most are sustainable with produce to pass on, sell and eat. They have repaid the loan in kind, not money. It works well.

phytoceramides gluten free May 28, 2014 at 10:59 am

Awesome article.

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