I wanted to write a quick follow-up post to this one I wrote last year about the micro-credit organization Kiva.org. In May of this year I lent $100 to Farzhana Mosah Khan, a tailor in Afghanistan:
Farzhana lives in district 17 of Kabul, Afghanistan. She is a tailor. She is married and lives with members of her family and she wants to help her husband support her family. She wants to take a group loan to expand her business and buy new machines because she wants to send her children to good schools to be educated. She hopes that if she works hard to be a good business dealer in the future she will make a good monthly income for her family. [Link]
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p>The total loan amount requested by Farzhana was actually $175, which means that another lender provided the difference. Farzhana needs about a year to pay back my loan (interest free). This isn’t a charity. You get your money back but simply have to forgo the interest. What that means is that if you already have a “charity portfolio” that you give to every year this isn’t really another charity to spread you thin.
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p>I decided to check out who the other lender was and his page documents the tremendous success he has seen during his involvement with Kiva. He gets paid.
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p>Farzhana posted the first installment of her loan ($22) in June. I think I am going to make some more loans. Need a demo? Check it:
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Very cool Abhi. Thanks for the follow up.
Oh no, not another HO (helping others) post. 🙂
Thanks for inspiring me, Abhi.
Thanks for sharing this, Abhi.
Mildly off-topic, but: am I the only one who cringed at Kristof’s idea of using a random picture of a woman in a burqa? Eek.
There’s also Heifer, which has an interesting approach of “Passing on the Gift.” You don’t get paid back, but the donor pays… um, forward, I guess.
How much interest does Kiva charge these people? I assume they do more than just manage the money distribution, but also provide local support (like education, counselling etc.) to make the money more effective.
Does Kiva.org charge interest?
No. Kiva.org does not charge any interest or fees to our Field Partners.
tamasha, i love watching Heifer in action. Their work in Ethiopia seems (surprisingly) sustainable and effective.
But the very next answer indicates that the field partners themselves charge the entrepreneurs interest. I have no problem with interest being charged, but I am wondering what visibility I, as a donor, have into this process, and how the interest breaks down as management overheads, local support, training, and so on.
Yes
8 Rahul: but I am wondering what visibility I, as a donor, have into this process, and how the interest breaks down as management overheads, local support, training, and so on.
Interesting questions, but ultimately, the very reason these are charities asking for donations (here, no interest loans with some (small) risk) rather than for-profit firms signing a contract with us to deliver “X” to “Y” may be because it’s just too difficult for (small) donors to monitor-detect “breaches of contract”–the charitable form provides some (crude) protection, though. See: http://www.amazon.com/Ownership-Enterprise-Henry-Hansmann/dp/0674001710
I’m going to check out Kiva!
rob, could you please re-explain that? I’m not sure I really follow, but it sounded like an interesting point. You mentioned that it may be difficult for small organizations (non profits, if you will) to monitor compliance, but for the same reason they wouldn’t normally contract out? Or are you trying to distinguish between the individual donor and charitable organizations, using the same reasoning? Thanks in advance 🙂
great post–very illuminating. i am going to check out kiva as an aside –its is also good to have the usual kind of posts back. after the recent very disappointing, high school level posts about being “skinny” , “putting out”, i was ready to give up on sepia mutiny abhi, please keep these posts coming
Thanks Abhi for sharing. We are always looking to donate to orgs where you can see where your efforts go. I loved reading about her work and how we can help. No seva is too great or too small by my book. And, I second Tara’s comments.
Camille, As I (big caveat) understand the arg’t, say you altruistically want to deliver benefit X to person Y. You could sign a contract with a regular firm to do that, for a fee. So,why do charities dominate this sector…. Perhaps because it’d be really difficult for you to tell if X got Y. So, instead, you donate to a charity that provides X’s to Y’s. Idea is charity has less (not no) incentive to “chisel.” Will X to Y happen…hopefully, but not necc’ly–but–the very same things that drove you to the charity instead of the “regular” firm will also and inevitably make it really dificult for you to know. So, while some charities are better than others, no doubt, it’s a bit of a rathole for small donors to start pursuing Rahul’s line of analysis–it’s analytically sound, just impracticable. Something is driving charities to dominate this sector–can’t just be tax-deduction–charities long predate income taxes.
I am not so sure. I actually think that a middleman like Kiva should perform two functions: 1. A market maker that matches donors and potential recipients all over the world 2. A provider of some assurance of quality to make sure that the donor’s money is not going to waste. There have been some cases (I think in Mexico, the company’s name was Compartamos, if I am not mistaken) where people believe that the microcredit was being provided with ridiculously high rates of interest akin to gouging.
I am not looking for practices with the rigor expected of a publicly traded firm in Wall Street, but I would like some idea of how the numbers break down, and some reason to believe that breakdown of numbers. That is essential to draw in a larger pool of donors who might be on the fence.
Personally, this is a criterion I look for when I donate money to charities, and I don’t see why it should be different in the case of interest-free loans.
Oh, this is interesting. My understanding was that the driving difference is profit. I don’t mean that in a judgmental sense, but rather, in a purely economic sense. In the case of the firm, you’re attempting to maximize profit. In the case of charity, utility can be measured as a function of altruism, and consequently you’re maximizing utility. I don’t know if that is too wonky of an explanation, though 🙂 I think for some people there is an element of “income redistribution” as well, and they want to give their money to an organization that is legally responsible to redistribute funds in a given way. In that sense, it’s similar to when foundations allocate grants. the element of donor-control is over the discretion of the organization.
15 Rahul I would like some idea of how the numbers break down, and some reason to believe that breakdown of numbers.
Pefectly reasonable to want to know–I’m just suggesting that the fact that all the “middlemen” like Kiva are charities rather than for-profits is indicative of the fact that it’s very difficult to know. The charitable form is meant as a (crude) answer to these sorts of questions, given that actually knowing (–> contracts) is too hard. Central problem is benefit goes to X not you(then you’d know)!
Cool!
To 16 · Camille
“non-profit” does not equal no profits in the accouting sense–Harvard has a $30 illion investment portfolio…. It means a blunted incentive to profit, compared to a for-profit. (Harvard officers can’t declare a $30 billion “bonus” this year! That’s why I’d go with a Kiva, in spite of some of these concerns Rahul is raising. If he finds the answers to his questions, more power to him–I’m just saying that Kiva’s charitable status is suggestive of that being a rathole for small donors to go down. A charity with higher overhead isn’t necc’ly worse than one with lower–the former may be serving more difficult cases, be serving more of a niche clientele, etc.
rob, this explains why we’re on two different wave-lengths. I’m talking economix, and you’re talking accounting 🙂
I am all for providing access to credit where credit is not otherwise offered or even lower access to credit where it is not otherwise offered. In that sense, I think Kiva is doing a great job. However, it is true that they lend to an actual MFI who in turn lends to the entrepreneur. Different MFIs charge different interest rates to the clients that are posted on Kiva’s website. The MFI is charged 0% interest and the entrepreneur is charged whatever rate the MFI chooses to charge, usually upwards of 20% effective. It is true that is extremely difficult to tell how the savings to the MFI from lenders impacts the MFI’s bottom line or whether that savings is passed on to the borrower. However, there is another benefit of Kiva’s service rather than just linking lenders and borrowers. The microfinance industry currently has very few large MFIs and foreign donors/grants/investors have tended to throw capital at very few organizations spattered across very few geographies. Kiva offers a way for smaller and more geographically remote MFIs to gain access to funds where they otherwise could not, and this is important.
Camille: In the case of the firm, you’re attempting to maximize profit. In the case of charity, utility can be measured as a function of altruism, and consequently you’re maximizing utility
non-profit managers aren’t uninterested in profits (I’d rather be pres. of Harvard than of Podunk, and I’m sure Yale would like to catch up with Harvard in endowment)–just less interested than for-profit managers (more profit does not mean “new bmw” for sure),so less likely (on the margin) to “chisel”–so, if I can’t tell whether person Y got the X I wanted to deliver, I’d rather go with a charity than a for-profit. Ultimately, small donors to charities are dependent on large donor investigations & gov’t regulation to make sure charities are on the up-and-up. but you and Rahul can have the last word.
Abhi, Thank you for posting this. I’ve been looking for something specific and charitable to do now as a couple together. We really wanted to and just sponsored a child in India. This is the perfect second thing to do long term.
nice title, heh.
and thank you for posting this. i’d read about this in the Toronto Star some months ago and it seemed nice, but it didn’t really make an impression. having someone’s first-hand account of being involved definitely makes me more interested in the process.
Kiva is great, their pres is an ABD I think. I have a lot of investments with them. I was working with a microfinance org. in India this summer and my boss was telling me that they have been in talks with Kiva who has been very much trying to get partnerships set up in India. However, the regulatory issues in India has made it impossible. As an outside org. entering into India, the investments has to be above a certain amount–kiva’s model being about “small loans make a big difference” isn’t going to fly as long as those “License Raj”esque barriers are still in place.
firm believer of micro lending. i think it to be the solution to all world’s problem. never heard of this org before. thanks for the info, abhi.
my brothers girlfriend works for kiva.. great organization…and greetings from tibet abhi, where blogging is blocked.. so surprised this showed up!
great post!!
Yep their Pres is Premal Shah is a cool guy as well.
Thanks, Abhi! I didn’t know about kiva. I would love to ‘loan’ some money.
Great to see kiva generating a positive response. It’s a really good organization. Field partners have just now been setup for other South Asian entrepreneurs so for those who are interested in helping out your brothers and sisters, check out Asasah (Pakistan), The Annesha Foundation (Bangladesh), Patan Business and Professional Women (Nepal), and Somaiya Group (India).
btw, Salil, if you’re out there, belated thanks for recommending Akshaya Patra awhile back.
MicroCredit, as developed by the Grameen bank, was never intended to be “charity,” but rather a viable business investment. While it may not have reached that point yet, at some point, Kiva wants to receive interest, and redistribute interest to the donors as well. The crucial benefit being of course, that most donors are just going to re-invest the profits from their interest into other people.
Obviously, altruism is involved, but the main idea is that this isn’t charity, it’s providing the same loan opportunities to the poor that everyone else gets (i.e. not being charged upwards of 30-50% interest).
1) Microfinance is and will continue to function as a charitable organization. It is impossible that they will ever be a viable for profit business.
2) Microfinance is a scam, it is still charity, disguised as something it is not.
Not so yo.
I appreciate the skepticism on this thread. For example, I agree that it is important that the middle-men don’t charge high interest rates (and Kiva should probably do a better job of saying exactly how much interest the recipient is charged). And I’ve heard P.Sainath complain that there are organizations in India who, by portraying themselves as microfinance lenders, are just as exploitative as your average loan shark.
And I realize that microfinance is only a small part of the solution to alleviating poverty. A $1000-loan to a farmer in africa is totally undermined if the US-Farm-Bill includes millions (billions?) of dollars in subsidies that make his business uncompetitive.
Even if its not yet profitable, for the 98% of the people who pay back their loans, with interest, this is not charity.
Thank you for this, Abhi. I really appreciate the video in particular – I was a bit fuzzy on exactly how microlending works. Nothing like real life experience to get me off my butt and start getting involved.
Omidyar disagrees. In fact, he (unlike Yunus) believes that this is the only way to scale microfinance.
Whoa! I would like to clarify that I am a big fan of microcredit, particularly in the Grameen model. Are there examples of where it fails? Sure, just look at Kenya for a prime example of corruption outweighing any possible benefits. That said, I don’t think it’s the program (microcredit) that we should be wary of, but rather, the provider. It sounds like Kiva is awesome, and folks have vouched for it. That’s what I am most concerned about when I donate money — who the organization is, what their reputation is with the local community, and how “effective” their aid program is (which I don’t measure as solely low overhead).
rob, I’m not arguing that non-profits are not profit-motivated (in the literal sense); there is a difference, after all, between non-profits and not-for-profits. That said, I really don’t think there is “less” incentive to scam off the top. In my opinion, the difference here is not the form of organization (although that can change the outlook/philosophy, and thus the product/outcome/method), but rather the legal system within which an organization works. For example, the risks/potential costs of defrauding as a 501(c)3 in the U.S. are really high, but this is not always the case in other countries.
This is totally untrue, both from a project design standpoint, and from an empirical standpoint. So far we have seen that microcredit, depending on its design, DOES work. If nothing else, it broadens the scope of capital and the potential of different actors to engage financially in a larger economic system. What is the “charitable scam” aspect for you? That instead of targeting already-privileged elites it targets the very poor?
I just wanted to say that I liked this point 🙂 If I were a donor, what I would prefer more than Kiva redistributing the interest to me (and others), would be if they redistributed it into other small loan projects for new lenders.
Abhi: Good work. Glad to see you back from your mini summer fishing expedition. Chick Pea: What in the world are you doing in Tibet? Yo Mom and my younger son scaled Mt. Kailash and Maan Sarovar during the week when 9-11 event happened here in USA. Don’t tell me you are on a prilgrimmage, are you? Take care.
Clicking on any of the partner pages linked to here and scrolling down shows that the average interest rate charged by Field Partners is 19%. Isn’t that kind of high? It does seem to be an improvement on local rates charged by moneylenders, so maybe it’s just high by my American standards.
At any rate, Kiva sounds pretty cool.
Abhi, thanks for this. I’ve been looking to donate the proceeds of a bet I won to a charity, and soon as I read this post I signed up.
abhi,
thank you for following up. this is quite informative.