Kiva and its Field Partners: Myths and Misconceptions

8 March 2010 at 06:47 9 comments

By Leigh Madeira, KF10, Ecuador

The more I read the Kiva Fellows blog, the more I realize that there is a lot of controversy surrounding Kiva, its Field Partners, and microfinance in general.  While I welcome the discussion, microfinance is a complicated concept and I have noticed that many times the criticisms are based on misconceptions of how Kiva and microfinance really work in the developing world.  Below please find a list of the most common misconceptions surrounding the topic along with why, in my humble opinion, they are indeed myths.

Myth 1

Kiva`s Field Partners charge clients interest on the loans from Kiva, which they keep to pay themselves comfortable salaries and pad their fat Prada wallets.

Response

Yes, the Field Partners do charge interest on the loans they receive from Kiva, but trust me, no one is getting rich here (according to my MFI`s 2008 public profile on Mix Market, the average employee makes just over $13,000 per year).  Even with the interest, many Field Partners barely make a profit (e.g. according to Mix Market, the 2008 average return on assets (ROA) for MFIs was 2%).

Myth 2

Field Partners could, and should, solicit donations to cover operating costs instead of charging clients interest.

Response

If only it were that easy!  To this I want to make several points:

  • There is not an unlimited supply of zero-interest funding for microfinance institutions around the world…to say that donations could suffice is quite an optimistic assumption!  Think about your investment portfolio.  Is a large portion of it invested in Kiva?  Or is it more focused on assets that generate a return such as mutual funds, stocks, and bonds?  I would love to meet the person who has half of their retirement portfolio invested in Kiva loans…but the reality is that investments are made to generate a return.  Zero-interest financing is hard to come by, which is what makes Kiva so unique.
  • Even if there were enough money in donations to cover a Field Partner´s costs, how do you know the money will keep coming?  Charitable donations dropped double digits during the recent financial crisis.  What would happen to your favorite Field Partner if their funding was suddenly cut 30% or worse?  What would happen to the borrowers?
  • Interest encourages borrowers to be disciplined for numerous reasons: (1) borrowers are more inclined to only take out the amount of money they actually need; (2) they pay back sooner to avoid paying more interest; (3) by charging interest, you weed out the clients who just want the money because it is available and free (also see Peter Marchant´s post)
  • A main principle of microfinance is sustainability.  Why do you make a loan on Kiva instead of making a donation through another source?  The appeal of Kiva and microfinance in general is that you are helping someone be self-sufficient so that they are not reliant on handouts.  Why would there be different standards for microfinance institutions?
  • There is proof that microfinance institutions that make a profit instead of relying on charitable donations are able to reach more clients – profitable MFIs are able to add 25% more borrowers than their unprofitable counterparts

Myth 3

Fine, the Field Partners need to charge some interest, but the interest rates charged are WAY too high!  It is usurious and does not help the poor.

Response

This one is my favorite!  Also the misconception that has gotten the most coverage (see Meg Gray`s post and Stephanie Koczela´s post).  I have numerous points to make in regards to this claim:

  • It is all relative…36% seems high to us, but in developing countries that is often much cheaper than any other option, if there even is one.  I find it extremely presumptious and slightly offensive when someone who has never lived in a developing country and never worked in microfinance claims that there should be a 10% cap to interest rates charged to microfinance clients.  Who are we to barge into an established, well-run microfinance institution to tell them how to do business, all based on our experience with a $500,000 mortgage with Bank of America in Santa Monica, CA?  The world is a diverse place and what works in one country may not be feasible in another.
  • No one is forcing these clients to take out loans with 36% interest.  If they don´t want or are unable to pay the interest rate, they don´t have to get a loan!  Poor does NOT equal stupid.  Microfinance clients understand what they are agreeing to.  If you think the borrower is business-savvy enough to merit your $25, what makes you think they don`t make the best choice when choosing financing?
  • Many poor people ARE able to pay 36% interest or more.  Here in the developing world the markets are extremely inefficient because of barriers to entry, one of which is access to capital.  Once you knock down that barrier it is not uncommon for profits to double, triple, or more.  Give these people some credit (no pun intended)!
  • In addition to explicit costs, microfinance institutions also must cover the cost of inflation, which can be quite high and volatile in developing countries.  Without at least growing with inflation, the Field Partner`s asset base will serve less and less clients.
  • When you factor in the cost of funds (8.5-12% for my MFI as most funders are not as generous as Kiva) and inflation (8% in 2008 in Ecuador)  you are likely already at a very high interest rate, which doesn´t even include operating costs and the default risk.

Myth 4

Microfinance institutions operate inefficiently…they don´t have to visit clients daily/weekly to collect repayments and could have offices closer to where their clients live so they don`t have to travel so far.  With lower operating costs, they could charge lower interest rates!

Response

Yes, many, if not all, microfinance institutions could operate more efficiently.  Couldn`t every company?  But let´s look at two criticisms I gleaned from Kiva blog commentators:

  • Why do some Field Partners have to collect repayments daily/weekly?  They could save money by doing it monthly — Yes, it is expensive to collect payments daily/weekly, but for some microfinance institutions it is their only option.  If you collect monthly, the loan officers are carrying around much more money and, depending on the area, it may be extremely dangerous for the clients, the loan officers, and the banks.  Also, repaying frequently in small amounts lowers the risk of the client defaulting.  Although the administrative cost is high, the safety concerns and risk of default may outweigh the costs.
  • The branch offices could be located closer to the clients to cut back on travel time — Well, they already are!  The problem is that some areas are SO sparsely populated that it wouldn`t make sense to open another office there.  Opening another branch in a town of 100 people because they have 10 borrowers there is the last thing a Field Partner should do to cut down on expenses.  The only other option is to exclude the more rural entrepreneurs from becoming clients, which would unfairly ignore many deserving entrepreneurs.

Finance and philanthropy often clash, which makes it understandable that microfinance has so many controversial aspects to it.  Regardless, I hope this blog has answered some lingering questions of the devoted Kiva reader and inspired a well-informed debate about Kiva and the role of microfinance.

Leigh Madeira is serving in Guayaquil, Ecuador with Kiva Field Partner Fundación D-MIRO as a member of the Kiva Fellows 10th class.  Please join D-MIRO’s lending team, make a loan on Kiva or donate today!

Entry filed under: blogsherpa, Ecuador, Fundacion D-MIRO Mision Alianza, KF10 (Kiva Fellows 10th Class). Tags: , , , , , , .

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9 Comments

  • 1. Hugo  |  17 March 2010 at 10:22

    Good job. So where is all this negative press appearing. I know about the WSJ, but where else? Perhaps we should begin an education campaign of our own, formal or informal.

  • 2. Sierra Visher  |  16 March 2010 at 15:52

    Great post Leigh! I’m a translation team leader now, and sent the link to this post in our weekly emails to the team and got feedback from a few that they appreciated very much what you said. Great job!

    Sierra
    KF6 and KF7

  • 3. Jacob  |  15 March 2010 at 23:19

    Good post

  • 4. Betsy Brill  |  9 March 2010 at 03:15

    An excellent post. Thank you!

    In 1997, I visited and wrote about successful, long-established microfinance institutions in India, Bangladesh, Egypt, and Indonesia. These organizations continue to thrive today because of best practices like charging interest sufficiently high to cover costs such as sending field workers to collect funds weekly (in some cases, even daily).

    Those who criticize the methods do not understand the daily reality of the borrowers and their tiny businesses.

    Imagine the vegetable vendor with her blanket on the sidewalk. If you’ve traveled in developing countries, you’ve seen her and probably stepped around her without thinking much about her life. If you haven’t traveled in developing countries, you are, perhaps, one of the critics.

    How much money will the vegetable vendor lose if she has to take time from her income-producing enterprise to go to the bank to make her payment?

    She will have to walk, as a taxi is likely to cost more than a week’s earnings. If she walks, the trip might take an hour or more each way.

    She loses sales during this time, and is likely to lose her produce, too, as she is not there to watch over her products. So this exercise in banking “efficiency” is going to cost her time and money that in all likelihood will exceed the interest she pays on her loan.

    The same woman in all likelihood has a husband who believes he can use the money she brings home as he likes… a drink with the guys; a game of chance that he believes could bring in big bucks with her tiny revenues. At some point while she is waiting to make her monthly payment, he is likely to take the money. Of course he does not win the jackpot (or if he does, does not return her money). Trust me, this is a story we saw repeated regardless of country or culture.

    Oops. Our borrower no longer has the money to repay her loan.

    So, she is one borrower in one situation. Multiply this scenario by hundreds of borrowers. Doesn’t it make sense to send the banker to the borrowers? Further, making frequent small payments is less burdensome on the borrower.

    Further, in the organizations we visited, the women also gave the mobile bankers tiny bits of extra cash to stash into savings accounts.

    We met many woman who actually had been able to save enough in this so-called inefficient form of banking to buy homes in their own names; to save for their daughters’ weddings (in India, dowry is a poverty-inducing tradition); to send their children to school… and on and on.

    Finally, charging sufficient interest rates covers expenses AND generates additional income to create a larger loan fund that will service yet more customers.

    Charging 0% or a rate lower than the associated costs of making the loan guarantees failure because, eventually, there will be no more capital.

    Do the critics suggest these women go to their local BofA or Wells Fargo to seek a lower-interest loan — or even to open a savings account? Well, you already know the answer about the likelihood of their receiving a loan. As for savings, mainstream banks require minimum deposits to open savings accounts… and those minimums aren’t the equivalent of 50 cents.

    I doubt the critics understand that money lenders’ rates can exceed 100%, which means that 36% interest is a bargain. We even met a woman who used to keep her extra cash with a money lender to keep it safe… He CHARGED her to keep it. (Reminds me of how BofA or Wells Fargo starts charging once your balance falls below a certain level — to the point where the balance can disappear completely.) Once she could give her extra pennies to the mobile banker, she actually began EARNING interest.

    I could go on and on, but these petty criticisms of microfinance incense me.

    If anyone wants to take on usury, why not tackle the costs of withdrawing your own money at an ATM machine? Wells Fargo charges $5 on each withdrawal at an international ATM, regardless of the amount.

    Consider that the maximum withdrawal is probably around $300. You are not borrowing a dime from anyone. It’s YOUR money. The bank is not paying a teller’s salary or benefits. Everything is happening electronically.

    You’re paying more than 1.5% to access your own funds. If, like many people, you take out $100 or $50, the rate for accessing your own money increases to 5% or 10%.

    THAT’s usury.

    • 5. Puss  |  10 August 2011 at 05:18

      I really apripecate free, succinct, reliable data like this.

  • 6. Sarah  |  8 March 2010 at 09:57

    I am so appreciative of your post, Leigh. Your analysis of personal investment portfolios with regards to soliciting donations and zero-interest financing really spells out why MFIs need to charge some interest in order to operate and optimize their affect in local communities. Thank you for this point-blank breakdown of Kiva.org myths and misconceptions!

  • 7. RaviG  |  8 March 2010 at 09:55

    +1 Jan & John, Ben.
    Thank you Leigh for putting in words what we Kiva Lenders have always felt. Thanks Kiva and everyone engaged with Kiva in any particular way. Best Wishes.

  • 8. Jan & John, KivaFriends  |  8 March 2010 at 08:54

    Very well done post, Leigh. I specially liked “poor does not equal stupid.” We lend through Kiva *because* we respect the borrowers business savvy and know that the situation they find themselves in is mostly caused by the “birth lottery” which we were fortunate to win. I also continue to trust that Kiva will search out and partner with responsible MFI’s with a strong social mission. -jan-

  • 9. Ben  |  8 March 2010 at 08:36

    One of the best posts on the economics of MFIs I’ve read. Well done Leigh!


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