"Kiva is the path-breaking, fast-growing person-to-person microlending site. It works this way: Kiva posts pictures and stories of people needing loans. You give your money to Kiva. Kiva sends it to a microlender. The lender makes the loan to a person you choose. He or she ordinarily repays. You get your money back with no interest. It's like eBay for microcredit.
You knew that, right? Well guess what: you're wrong"
I originally posted the quote above as a response to a diary about a project that one diarist had (or at least he thought he had) funded through Kiva.
The Kiva story is complex and in some cases quite mysterious. The organization has tapped into public’s desire to help through very slick PR and campaigning, but underneath that shiny coat of paint is the same rusted out old microfinance model that has been devastating to the poor all over the world.
The Next Billion site has recently published a more in depth look at Kiva (The Kiva Fairytale: It's a microlending superstar - but who is it really serving?) which is well worth reading in full. A few of the highlights follow below.
Today Kiva brings in over 17 million a year in revenue and support. It is backed by celebrities, it is high profile, and it is best known for the way it appears to bring individual stories to potential lenders and make them feel good about being able to contribute directly to a project they want to support.
But does it actually work? Is poverty being reduced through the work of Kiva? No. Not according to any of the research.
Despite many years of trying, independent academics have been unable to find any convincing data confirming an overall positive impact on poverty reduction achieved by indebting the poor…. With interest rates often exceeding 100 percent, it is not hard to see how microcredit can progressively increase rather than decrease poverty, as demonstrated poignantly by crises in Andhra Pradesh and elsewhere
The bolded part of that excerpt may come as a shock to some Kiva supporters. 100% interest? That can’t be true. Kiva is non-profit and doesn't charge interest right? Well yes and no. Kiva itself doesn't charge interest, but they also are not the ones making any of the loans. What they do is send money to other micro lending institutions who in turn charge 100% or more in interest. How much exactly? We don’t know because Kiva can’t or won’t say.
Kiva cleverly chooses to reveal out-of date portfolio yields instead of actual interest rates on loans, conveniently and consistently under-estimating the real cost to the poor…. Interest rates approaching 100 percent would raise too many eyebrows – they’re best hidden.
Well OK, but at least those making the loans have the ability to choose the project they want to fund through Kiva right? Maybe it costs more, but only funded projects are moving ahead, so there is no waste, right? Wrong again. Kiva is not efficient. And the loans you make to them are not for what you think.
In 2012 Kiva spent $14 million to loan $111 million. Despite most staff being volunteers, Kiva managed to spend $0.13 for every $1 loaned. Typical specialized microfinance [are] 6 or 7 times more efficient than Kiva in getting money from investor to poor person.
Kiva’s initial attraction was that it was a peer-to-peer lender, but it is not in fact a peer-to-peer at all. The loans featured on the website were made months before, and Kiva users are essentially buying them from the banks.
Makes you feel good to be personally bailing out banks that are charging 100% interest on the poor doesn't it? Oh, but it gets better. Kiva doesn't appear to even be able to move its donations well, with a reported 80 million in donor funds sitting in Kiva bank accounts doing nothing but gaining interest for Kiva. There is also some funky business going on with the Kiva banking partners
Kiva’s default rates on loans are famously low, apparently. And yet the banks themselves report default rates substantially higher than Kiva. Either Kiva miraculously manages to weed out all the non-performing clients better than the bank itself can, or the bank is covering loan losses itself to ensure a steady flow of interest-free capital.
The bolded (mine) should give potential lenders plenty to think about. There is much more in the story and I encourage you to review it at Next Billion.
I am not down on charity. I actually work with an organization trying to help reduce poverty through financial inclusion (not a competitor to Kiva in any way). But I also think that organization like Kiva may be doing much more harm than good and potential donors ought to be at least aware of the realities of how the organization works, where the money actually goes and how much the overhead takes off the top. When simple questions like exactly how much interest is being charged for these loans can’t even be answered, alarm bells should be ringing.
In a different field Kiva would be an outrage, exposed and shut down under a mountain of protests, but so far at least the donors don’t seem to want to know or even ask the questions they would for any other organization. We want to believe in the dream of Kiva. We want it to be real so badly so we can feel good about donating and helping that poor farmer. But a dream is really all it is.
Kiva plays an important role in undermining the wider global struggle against poverty, deprivation and inequality. Kiva is a scam, and if we are to contribute to the welfare of the poor and restore any faith in the integrity of the U.S. financial sector, such players should be regulated immediately.
Time to wake up.
Full original article here: http://www.nextbillion.net/...
UPDATE: Rec List- Thanks. It is worth examining, not only Kiva but the whole microcredit and development aid landscape. Kiva proves two things to me. First that there is a huge demand from those with the means to find a way to help others. That should give us hope. And second, that without strong regulations, consumer protection guarantees and financial literacy efforts, organizations like Kiva will continue to abuse that hope to separate us from our money.
UPDATE 2: A nice response from the author of the piece to some of the points rasied. I think it sums up the issues very nicely:
Essentially Kiva falls between the cracks: it looks like a financial intermediary, but is regulated as an NGO. So, I think we have to start by formally incorporating regulations, and then monitoring to see whether the likes of Kiva are able to comply. I suspect they would struggle, if the regulations are remotely meaningful.
However, the first step towards regulation is knowledge and transparency. If Kiva's users are aware of these facts and accept them, then perhaps it is okay (broader criticisms of the effectiveness of microfinance notwithstanding). But they are often ignorant of the subtleties behind Kiva's model. If you look at the comments posted by some users they often have little idea what they are actually doing. They have no idea of the interest rates, because Kiva doesn't publish them. They Tweet things like "help me raise another $50 to fill this loan" when it clearly states that the loan was disbursed some months ago. We need to ensure first that those who use Kiva are INFORMED, and ideally that the regulator is also.
Kiva has responded to the post at Next Billion.
It is a well written response, but I think it glosses over (or ignores) many of the most important questions. The responses to this from the original poster are there as well. Thanks again everyone for the great discussion.