Bad Roads, Interest Rates, and MFI Sustainability

7 January 2010 at 09:19 173 comments

By Meg Gray, KF9 Nicaragua

One example of a bad road I have faced.

I’ve driven over some pretty terrible roads over the last three months. It doesn’t seem to matter if they’re gravel, paved, dirt, or a mixture of the three. In Nicaragua every road has character and usually this “character” makes it harder to get to CEPRODEL’s clients. Now besides being an inconvenience, why does this matter? It matters because bad roads are just one of many factors that contribute to high operating costs for a microfinance institution (MFI). High operating costs mean higher interest rates are necessary in order for the MFI to be sustainable.

I feel like the conversation about interest rates usually starts and stops with the word “usurious” or “unfair,” when in reality it is much more complex than that. CEPRODEL charges 36% interest on loans to small businesses (rates are lower for some other types of loans) and yet I’ve talked to numerous clients who comment that they like working with CEPRODEL because their interest rates are so low. How could this be?

Bad roads make it harder for MFIs’ to visit clients or for clients to visit MFI offices. But on this front, roads are just one reason that MFI’s have such high operating costs. Here are just a few more:

There are other road obstacles too...

-Populations are often very spread out. A small population spread thinly over a large area is much harder to reach. Even with centrally located offices, many clients still live quite a distance from the branch office. Many clients also have no way of visiting the branch and thus require more travel time from loan officers

-Very small loans are more labor intensive. Think of all the paperwork you had to do to get a loan for a house, a car, or tuition. An MFI’s application process probably doesn’t require quite as many signatures, but it is still a lot of time, manpower, and paperwork all for a very small loan. In other words the administrative cost of a loan is fixed no matter how small it is.

-Frequent repayments (often daily or weekly) are more labor intensive. The documentation of frequent repayments is also time consuming as is payment collection.  For example, many CEPRODEL offices have loan officers that spend every afternoon walking or driving from business to business collecting repayments

Now, how are MFIs supposed to pay for all of this? Yes, they could keep seeking out grant money year after year, but I, for one, would like to see them become sustainable. The way for them to do that is to charge enough interest to cover their operating costs. While these rates may seem ridiculously high to us, MFI’s are not forcing people to take out loans. MFIs are providing a service and that service is in demand even with 36%, interest because these services are valuable to their clients. In short, these interest rates are necessary if MFI are going to provide the kind of services they do.

As long as we have loan officers willing to drive 30 kilometers through the mud on a motorcycle to spend an hour (or more) going over paperwork with a client all for a loan of $250, then yes interest rates are going to seem high, but financial services will also be reaching groups of people who have never had these opportunities before. And more importantly, these new clients will have ongoing access to financial services since the interest rates they are being charged will allow for the long-term sustainability of the MFI.

Meg Gray is finishing up her last week at CEPRODEL, a Kiva Field Partner in Nicaragua. Make a loan to a CEPRODEL entrepreneur today!

Entry filed under: All, Anti-Poverty Focus, blogsherpa, CEPRODEL, Facilitation of Savings, Family and Community Empowerment, Innovation, KF9 (Kiva Fellows 9th Class), Nicaragua, Social Performance. Tags: , , , , , , , , , , , , .

Micro-business on the mind And What Are Your Hopes and Dreams…? For Your Family… For Yourself?

173 Comments

  • […] Kiva organization has been defensive about its situation. It’s saying that the microfinance industry has no choice but to charge […]

  • 2. tran xuan ngoc  |  5 January 2012 at 05:44

    I want to be guided to a loan on Kiva? I really need help with trade and capital to escape poverty! glass look forward to receiving enthusiastic support! sincere thanks!

  • […] who charges exorbitant interest rates to borrowers unable to obtain a loan elsewhere. And for lenders concerned about Kiva Field Partners’ high interest rates (which in Ecuador, due to transportation and administration costs, reach no higher than 30 […]

  • […] who charges exorbitant interest rates to borrowers unable to obtain a loan elsewhere. And for lenders concerned about Kiva Field Partners’ high interest rates (which in Ecuador, due to transportation and administration costs, reach no higher than 30 […]

  • 5. Ian  |  20 August 2011 at 02:27

    The issues of inflation rates corresponding to small loans is something that has troubled me as a lender for some time. Micro Finance and Macroeconomics are inherently consociated through the economic policies of the governments administrating the regions in question; and these policies, due to their corresponding effect on small businesses, cannot be overlooked. There is exists an ambiguous nature to the “charitable lender”.

    However, I feel this is a complication of the situation that ultimately traverses the altruistic nature of the lender. Vic rightly points out that inflation is a central factor in the calculation of interest rates and with yields on government bonds in excess of 25% in some developing nations, an interest rate in excess of 35% on a small loan is not exhorbitant due to administration costs and risk tolerance factors. Indeed, if I borrowed money at a rate lower than the government bond yield, I could simply buy bonds with that money, pay the principle and interest back and make a profit doing essentially nothing – not what we want as lenders. Although this is how most bankers and financial managers do indeed get rich.

    However, inflation is not as simple as the percentage change of the price index in a country. For instance, hoarding, allocative efficiency and cost-push inflation can cause product specific inflation related to supply and demand, the most obvious example to westerners being oil and subsequent gas price fluctuations. Now, if an entrepreneur finds themselves dealing in a product that, during the term of their loan, experiences substantial inflation – they win; if not, well then poverty and despondency rear their ugly heads once more.

    Inflation is something that practically nobody really understands or can predict. Especially in volatile economies. Nevertheless, I do acknowledge that all costs that a field partner may incur are in some way influenced by inflation and I understand that the very existence of these charities depends on covering these, often unpredictable, costs. That is a fact that cannot be avoided.

    My personal solution to this problem, albeit perhaps naiive and largely utopian, is to calculate the operating costs of dispensing and administering a loan and including that as a donation along with the principle loan amount. In essence, an interest forgiveness action on the part of the lender. For example, if the interest on a $100 loan over a period of 12 months is $24, I personally would have no problem paying $24 to make a $100 loan to somebody willing to work their way out of poverty. I consider it a donation. A donation coupled with a loan. It is easier for me to eat the $24 than a shopkeeper in Senegal. Does it make economic sense to get $100 return on a $124 investment? No. Does it help me sleep better at night? Depends on the effectiveness of the field partner in getting said entrepreneur out of poverty. Is it in accordance with my original, altruistic intentions? More so. If a steelworker in Pittsburgh can donate a bit of money to help a blacksmith in Bolivia then the system is working according to my expectations. Is it sustainable? The big question. Well, no debt based economy is. Eventually humankind will realise this in a catastrophic way, but until then I hope the working people of the world will get a break.

  • 6. Vic  |  20 July 2011 at 10:13

    Holy lord, I only got through the first third of the comments before my eyes started bleeding at the sheer vociferousness of people who haven’t a clue about what they’re talking about.

    Lesson 1: Economics
    Many of these 3rd world countries have inflation rates in excess of 20%. That means that the yield on government bonds (if they have capital markets, which granted not all of them do) must be something like 21-23%. That’s right, the GOVERNMENT borrows at a “usurious” rate of 20something percent. Not because they are stupid, not because some wall street fat cat is taking advantage of them, but because no rational being would ever make a loan where the net result of the loan is the lender losing money. If you lend 5 big macs worth today and get back 4 big macs worth in 30 years, you lost money, even if the 5 big macs today were worth $100 and the 4 big macs 20 years from now were worth $1000. Money’s worth is dependent in its convertibility to goods, not on the number printed on the bill.

    Therefore, when considering the “usuriousness” of interest rates, either research the prime rates, customary commercial lending rates, and inflation rates of the economy in question or politely stay quiet.

    Lesson 2: politics
    Many of these 3rd world countries have 2 factors that blur the value of statistics:
    2.1 – An overpowering government that is free to manipulate statistics presented to the public.
    2.2 – Lack of roads, resources and infrastructure to collect adequate data; loose approximations are presented in place of actual reliable data
    For these 2 reasons, even though one might find a country’s inflation rate to be 20%, the actual inflation rate might be 30%. Additionally, a woman who took out a 36% loan might have done so in order to start a corner-shop pharmacy, and the inflation rate in the pharmaceutical retail industry might be something like 38%. Effectively, the woman’s income-earning potential outpaces her interest rate. These are the cases in which microloans should be granted.

    Lesson 3: Finance
    Like I mentioned before, I had to stop reading your comments before – If I had to sit through one more assertion about 36% interest rate on a $100 loan being equal to net interest payments of $36, I was going to have to gouge my eyes out. This is simply not the case, do not assume that all loans are granted on a balloon payment basis because this is most often not the case. See Brian Candler’s post for more details. His post is post #6. Read it, then read it again, then read it again.

    Lesson 4: Finance
    Due to asymmetry of resources and talent in 3rd world countries, the profit margins of successful small businesses are NOT the same as they are in america. For example, in the Dominican Republic a grocery store can easily sell for a 30% markup and have 6month payment terms. This is HUGE. The asymmetry of resources and the lack of aggressive competition makes it so any small businessman can mark up their goods by massive amounts and still sell – because that’s simply how it’s done in that country. Therefore, the aforementioned hypothetical corner shop pharmacist could not only have earning growth that outpaces her interest rates, but she could also be making real money by marking up her goods by 40% if she found a good geographical niche.

    PS: many 3rd world countries also have extremely relaxed legislation with regards to prescription drugs – almost everything is sold OTC. So don’t go on ripping on the impossibility of my hypothetical example.

  • 7. dr. maqsud omar  |  16 July 2011 at 06:57

    Kyle,

    thanks for your encouraging note/
    can you please add few more points, why we should continue to support KIVA.

    and also advice for KIVA staff….how they can add few simple points
    about interest rate on the site.

    Best wishes.

    May god bless us all.

    Maqsud
    sydney/australia.

  • 8. Chris.  |  27 May 2011 at 23:57

    The deepest need that each person has is for self-esteem, a sense of feeling important, valuable and worthwhile. Everything that we do in our interactions with others affects their self-esteem in some way.

    Being part of a micro finance group teaches the individual borrowers new skills, they have new responsibilities to live up to and there are expectations placed upon them.

    Fulfilling these responsibilities and living up to there own expectations of themselves can lift self-esteem and therefore an individuals sense of personal power, opening minds to new possibilities.

    Why would we want to forgive loans and take away the opportunity for people to feel a sense of personal satisfaction and accomplishment.

    The best gift we can give is to allow people to complete there contract with honor and pride, to gain self respect and the respect of others.

    This kind of personal growth will help people move forward and grow their lives far faster than any amount of money we provide charitably.

  • 9. Samantha  |  27 May 2011 at 17:59

    Although the interest seems high, I believe the fact that the loans are available is crucial. I myself now have a doctorate and live in the US. Yet, there was a time I had to borrow money at the rate of $20 for every $100. Unfair? No. I was grateful that they let me borrow money without collateral and pay the rent and buy food for my children at the time. I had a full time job, but it was paycheck to paycheck. I think part of the free market economy is that people should be able to decide the risks they are willing to take.
    Would we really be helping those courageous people by forbidding those interest rates and thus making it impossible for them to borrow money that they desperately need?

    I think there needs to be FULL disclosure when the loan agreement is signed. But I bet that many of those enterpreneurs are more than willing to put up with the interest rate, just for the chance to realize their dream.

    Along those lines…. I would like it if there was a way that instead of just re-investing, we could choose to “forgive” parts of a loan, if we wanted to.

    Any thoughts on that?

  • 10. Chris.  |  24 May 2011 at 00:43

    Whilst the work of the lenders is somewhat philanthropic the whole concept is a business….a micro finance business, to help people in business.
    The payment of interest therefore is normal, and I believe, contributes to the overall business education of the borrower by assisting to grow the mindset and attitude to a new level.

    Many people want an opportunity to improve their lives, not charity to fix it for them. Maintaining a good sense of self esteem while improving your life and supporting your family is important for all of us.

    Given the short term and small amounts of the loans the rate of interest is reasonable, and necessary to sustain the availability of the funding.

  • 11. Viet  |  9 May 2011 at 18:16

    one possible solution is Kiva will need to educate their field partners about the intent of Kiva or what Kiva is about: Kiva is NOT a business. It is a charity organization provides easy access to capital to the poors. In that spirit, they (the field partnerts) might change their view of what Kiva is, and reconsider to contribute their effort to the whole process as part of the charity effort.

    or Kiva collaborates with government agencies as partner, so they can share the expense of setting up/ managing the infrastructure of delvering capital.
    or seek private donations to help with the expenses. obviously, those poor farmers don’t need to carry additional burdens.
    oh well, almost every thing in life needs an infrastructure to deliver services and products to the users (an analogy is like running an oil or water company, basically, the company has free access to water, but it needs to set up water treatment plant to process it, then lay down pipes to deliver it, hire people to run it, but then these commercial identies are private businesses, they need to make profit to survive while KIVA is not a business. it is charity organization.
    or
    search for a good hedgefund manager, who likes to do some charity works (manage money for free), then allocate some KIVA fund for him to manage. then hopefully, gains from this account offsets some of the expenses.

  • 12. Brian Candler  |  27 April 2011 at 01:48

    I think there is some misunderstanding of basic concepts like interest rates shown above. For example:

    “paying $118 back on a $100, 6-month, 36% loan is easy enough”

    Unless the borrower held on to the whole capital throughout the term and made a single lump-sum repayment after 6 months, that calculation is incorrect. They are likely to have been repaying weekly or monthly, which means the capital owed goes down over time, which means the interest added goes down over time. Roughly speaking, the average outstanding balance over the period would be half the original loan, meaning they pay around $9 in interest.

    Doing it more accurately for this example, assuming monthly repayments, there would be five repayments of 18.22 and a final repayment of 18.18, making 109.28 repaid in total.

    0. initial balance 100.00
    1. plus interest 102.60
    after repayment 84.38
    2. plus interest 86.57
    after repayment 68.35
    3. plus interest 70.12
    after repayment 51.90
    4. plus interest 53.25
    after repayment 35.03
    5. plus interest 35.94
    after repayment 17.72
    6. plus interest 18.18
    after repayment -0.00

    At the end of each month the outstanding balance increases by a factor of (1.36 ^ (1/12)) = 1.02595 if the APR is 36%

    For daily interest the formula would be (1.36 * (1/365)), and so on.

    Of course, this has nothing to do with the debate about whether (1) it actually improves quality of life for the individual recipients, and (2) whether the Kiva lender should take all of the risk and none of the reward.

  • 13. Lender  |  5 April 2011 at 04:04

    using the numbers given in the text above $250 and 36% interest rate gives something like 3900 Philippine pesos. Since the average monthly Philippine salary is in the order or 6000 Pesos the guy who makes the motorbike ride is pays 0.65 months salary for a 30 km ride and back with an hour discussion. Seems to be way out of reason. Hard question to resolve but better transparency might help a bit.

  • […] aimerez aussi Les dérives de la microfinance indienne Les limites de la microfinance Bad roads, interest rates and MFI sustainability (explication de pourquoi les IMF ont besoin d’appliquer des taux […]

    • 15. joyce  |  16 July 2011 at 06:49

      the amount is not very high people can afford from joyce

  • 16. Roxanne  |  22 February 2011 at 11:21

    In Canada, the government has capped legal interest rates at 60%. Some credit cards actually charge 29.9%. Since the microloans are for short terms, I’m not concerned about a 36% interest rate.

    As for transparency, I just spent 20 minutes looking around, before deciding to make my first Kiva loan, and I don’t feel like this information was being hidden from me.

  • […] I found that I was repeating myself in answering them. It is expensive to run an MFI. There are bad roads and very high transportation costs, it is time consuming to make visits to borrowers, borrowers […]

  • 18. david corner  |  18 January 2011 at 05:32

    WAS SPECIFICALLY REFERRING TO THIS QUOTE:

    “While these rates may seem ridiculously high to us, MFI’s are not forcing people to take out loans. MFIs are providing a service and that service is in demand even with 36%, interest because these services are valuable to their clients”

  • 19. david corner  |  18 January 2011 at 05:31

    This kind of reasoning should automatically set off a red flag. This argument is often used to justify any economic injustice under the disguise of free will as to not address the underlying issues.

  • 20. Al Fabrizio  |  17 January 2011 at 13:44

    This article doesn’t actually address the success of the field partners in actually getting people out of poverty. It states: While these rates may seem ridiculously high to us, MFI’s are not forcing people to take out loans. MFIs are providing a service and that service is in demand even with 36%, interest because these services are valuable to their clients

    Because people continue to ‘take’ doesn’t mean it’s good practice to borrow at grossly usurious rates. I’m hard pressed to see how anyone can be successful in a business enterprise paying those kinds of rates.

    Until I see data, and Kiva hasn’t provided any, that these highly usurious lending programmes are capable of producing results, I’ll be sitting on the sidelines.

  • 22. vaalea  |  16 January 2011 at 04:14

    Here is a recent article on the subject

    Sacrificing Microcredit for Megaprofits
    http://www.nytimes.com/2011/01/15/opinion/15yunus.html
    written by Muhammad Yunus, the founder of Grameen Bank (providing microloans), received the Nobel Peace Prize in 2006.
    “The maximum interest rate should not exceed the cost of the fund — meaning the cost that is incurred by the bank to procure the money to lend — plus 15 percent of the fund. That 15 percent goes to cover operational costs and contribute to profit. In the case of Grameen Bank, the cost of fund is 10 percent. So, the maximum interest rate could be 25 percent. However, we charge 20 percent to the borrowers. The ideal “spread” between the cost of the fund and the lending rate should be close to 10 percent.”

    from wiki :[Bangladesh] is also the most densely populated large country in the world, and it ranks 11th in population density, when very small countries and city-states are included.[80] A striking contrast is offered by Russia which has a similar population spread over a land area that is 120 times larger than Bangladesh.

    Which has an effect on cost on administration of loans… anyway, a relevant read I think.

    • 23. vaalea  |  16 January 2011 at 04:22

      I don’t think it is fair if a bank is for profit and making profit off the loans/off our money while we receive nothing. They should be sustainable, and charge the interest necessary, and run as a non-profit if they are benefiting from our non-profit loans. For some to be non-profit, it may require a higher interest rate in one area than in another.

  • 24. anonymous  |  13 January 2011 at 18:05

    wow, i wasnt aware of how high the interest rates actually are. makes me wonder if loans with 30-40% interest actually help someone or just raises the degree of dependance of the poor.

    “While these rates may seem ridiculously high to us, MFI’s are not forcing people to take out loans. MFIs are providing a service and that service is in demand even with 36%, interest because these services are valuable to their clients”

    thats exactly the point. of course this service is valuable to them and they are not able to get this service anywhere else. this is why these organizations can just tell their clients the interest rate they have to pay. and they have to agree because they need the money.

    most of these organizations dont even bear the risk of someone not paying back the loan, so kiva should really ask and calculate if it can really be fair to charge almost 40%.

    i think microfinancing is not going to help on the long term if theres no way to offer interest free loans or loans with MUCH lower interest rates to the poor. maybe you could find partners who dont want to earn money but are willing to base their work on donations in the future. you could just add the possibility to donate for the field partner as well as for kiva on your website.

  • 25. SeanSR  |  6 January 2011 at 14:27

    I understand that there is a lot of overhead when you make numerous small loans. But as a Kiva lender (so far), I am finding it extremely difficult to believe in this model and continue any further. Let me use some real numbers as well:

    I have lent to a borrower in Paraguay. The field partner is Fundación Paraguaya.

    The effective interest rate charged by this FP is 39.70%. Average Loans made by the FP per year is USD $1.5Million.
    I.e nearly $600,000 in interest and fees collected per year.
    Total staff listed for this FP is 18.
    Per Capita for this nation is abount $2600
    Prime Interest rate for 2008 rate in Paraguary is 25.2%. (Kiva’s Field Partner rate is 39.70%)
    The loan default rate for this field partner is 0.3%.

    Now, considering that each of the staff make $5000 per year (twice per capita), that still leaves about half a million dollars for non-staff expenses.

    Well, assuming that there is a legitimate reason for this exorbitant interest – I still cannot imagine anyone borrowing at 40% is being pulled out of poverty. In any country.

    I am going back to direct aid and am really sad to be getting out of Kiva and microfinancing – I had high hopes for both.

    I would really appreciate if someone could help convince me that this is still the way to go and that somehow a 40% interest charged to some poor person brings them out of poverty.

    • 26. Jason  |  14 January 2011 at 22:06

      I did a simple loan calculation with a loan of 1.5 mil and an interest rate of 39.7% and a repayment period of 12 months. The lender would be getting 341,480.09. After paying their employees 5,000 each they would have 250,000 for business expenses.

      Since you miscalculated the earnings of the lender/partner i wonder if you may have come to the wrong conclusions in other areas. Don’t dismiss them too quickly.

      I too would appreciate seeing more information about the partners; this whole business of micro lending is new to me and i would like to see more education on the matter.

    • 27. Jeff Bochsler  |  30 March 2011 at 15:15

      Al,

      Based off your thoughts, I thought you might want to know of the latest in microfinance. The big questions of late are going one step further than the interest rates, though interest rates will always be part of public’s discussion. The big questions concern whether 1) these loans are actually helping pulling people out of poverty, or helping them at all 2) are these loans sustainable at these rates, and, if not, then what are the alternatives (you see a lot of backlash toward NGOs that turned into actual banks because these NGOs were finding these rates were not actually sustainable. Thus, they flip the switch to a banking institution, begin collecting deposits, loaning dollars on much lower risk borrowers, and use these funds to aid the poor. Sustainable NGOs and others would call this “Mission Drift” as 40% of their loans are now going to the poor instead of 100%) 3) Why aren’t more of these client’s micro-businesses evolving into more small businesses. 4) Why aren’t there money in the small business markets? Or do these clients really want to grow to such a level? Perhaps we need to be handing out less loans to the masses in poverty and more loans to the few poor clients that have dreams of small to medium size businesses, providing jobs to many of the others? 5) Though paying $118 back on a $100, 6-month, 36% loan is easy enough when one buys their first sowing machine because productivity increases dramatically, paying back another $118 loan after buying shears might be tougher because of the law of diminishing returns. How is this being factored into the equation?

      I’ve included some articles that may get us all one step closer to these answers. But, in short, in talking to an NGO responsible for evaluating the effectiveness of micro-loans, the verdict is still out on many of these issues. I encourage you to keep questioning and challenging to make us all better. It does seem MFIs that are offering business and health education along with savings programs and insurance are having better success than others.

      I look forward to hearing your thoughts.

      https://mail-attachment.googleusercontent.com/attachment?ui=2&ik=337b5e8a3c&view=att&th=12ef7cf140711163&attid=0.1&disp=inline&safe=1&zw&saduie=AG9B_P-DCfdGoxru36UCEF7-XLGg&sadet=1301436901988&sads=ImC9ZYCC2B-VAhM4JACJK3xYU10&sadssc=1

      Is there an overindebtedness problem? http://microfinance.cgap.org/2011/01/25/flying-blind-on-over-indebtedness/ (there´s a whole series of articles)

      The “missing middle” – why aren´t there more SMEs in developing countries?
      http://www.hks.harvard.edu/centers/cid/programs/entrepreneurial-finance-lab-research-initiative/the-missing-middle
      http://noompa.wordpress.com/2010/11/08/the-missing-middle-in-our-microfinance-knowledge-abhijit-banerjee/

    • 28. Rick Bavin  |  24 August 2011 at 17:17

      Your calculations on the amount of interest paid were probably wrong because you did not take into account that in many cases the loan was paid off monthly and probably weekly so the interest paid each time would be diminishing as the debt was repaid. Also these micro-finance companies wish to grow and help even more people so they need to make a profit to expand the services they provide. There is also the risk that a loan they have granted to somebody will not be backfilled by Kiva so the micro-finance company then has to carry that loan with money of their own. Dont forget that we as Kiva lenders, by backfilling loans enable MORE people in third world countries to borrow and make their lives just that little bit more comfortable. We in the western world when we get out of bed in the morning wonder what we will have for breakfast, people in third world countries wonder if they will be able to afford to eat that day. I have been to third world countries and seen for myself how just $10 can make a huge difference long term to people there so I urge all Kiva lenders to not lose hope and continue to assist the working poor

  • 29. John Franco  |  5 January 2011 at 11:56

    http://www.nytimes.com/2011/01/06/business/global/06micro.html?pagewanted=2&hp

    After reading this article in the New York Times and looking at the interest rate of MFL for the loan I had just helped backpay was 73%(!!!!) I think that Kiva needs to come up with a response. Is Kiva’s mission to subsidize Micro Finance Lenders or support borrowers climbing out of poverty? These two goals might be leading in opposite directions with the perception that borrowers are suffering.

  • 30. Evelyn  |  2 January 2011 at 05:41

    My comments are essentially the same as what most people have already posted: transparency regarding interest rates.
    I would rather see the administrative costs posted separately (eg. transportion costs to interview the applicants and costs associated with reviewing their projects). I made a separate donation to Kiva for administrative costs but if there are administrative costs for the specific loans of individuals in need, I’d like to know what they are.

  • 31. Saluki  |  14 December 2010 at 07:41

    While I have no problem with MFIs charging interest rates in order to become sustainable businesses, I would like to see Kiva disclose them more openly. In particular, I would like to be able to easily use the interest rate when I’m deciding what loan to fund, without having to cross-index the lending agency with the separate list of interest rates by hand. I want this so (1) it’s easy for me to favor companies with lower interest rates over those with higher and (2) so that I can make comparisons between different lenders in the same general area and get an idea of what a “fair” rate really is for that time and place. It’s borderline deceptive to hide these rates in the back of the book, so to speak, so that it’s not immediately apparent what the terms of the loan are to the person who you’re trying to help.

    In addition, while you will need some certain interest rate as a lender to make a sustainable profit, it seems to me that you would need a lower rate to be sustainable when the principal of your loan is being fully subsidized, not to mention the default risk that the lender just avoided with the subsidy. But again it’s hard to evaluate what seems fair without getting a broad look at what individual loans cost from different organizations in the same place and to people in the same sorts of circumstances, or (even better) by being able to look at the books of some of these lenders to really see in black and white what the costs of doing business are.

    • 32. Benjamin Rosenbaum  |  3 January 2011 at 05:13

      I’d like to add my voice to those requesting more transparency — in particular what Saluki said first — the information on inerest rates is already available on the website, so why not be able to sort by it, see what’s the average in the region, etc?

  • 33. Sacha  |  29 November 2010 at 09:21

    I’ve been lending on Kiva for a number of months now, and I have to agree with the comments about transparency. There are good, well-reasoned arguments explaining why the interests rates charged by the field partners are so high. Kiva should not be afraid of disclosing this to the lenders, and it should be included in the section explaining how Kiva works.

    Information about interested charged is really important to lenders, and I can see a couple of posts by Muslims above this one expressing dissatisfaction about being involved in what they consider usuary, when they didn’t realise that this was the case. I think Kiva needs to address this issue, and update its webpage to reflect the information that lenders need to see.

  • 34. Richard Middleton  |  14 November 2010 at 16:16

    I fully agree with Jay’s comments about bicycles – I support a local group called ThaiCycles that provides bicycles to help Thai children get to school (see http://www.thaicycles.com/home1.htm). But why do we always have to pose these questions as a dichotomy, and label everything either right or wrong? There are literally billions of people in the world living on one or two dollars a day, and we need to use as many ways as we can in order to help them. It may be charity, like the bicycles; it may be microfinance, like KIVA (which I am also very happy to support); it may be helping invent technological devices which can be maintained by villagers (such as UNICEF’s water pumps); or it may be political here in this country (such as shaming manufacturers from using sweatshop labor, or persuading USAID to use local talent rather than forcing countries to use extraordinarily expensive consultants and US technology). Above all, we need to hear from the recipients: almost all these comments sound as though they come from highly-educated westerners, but if the people who actually take out (and repay!) KIVA loans think they are the best option open to them, should we tell them they should instead wait for a charitable handout?

  • 35. Kyle  |  10 November 2010 at 21:49

    In North Carolina, interest rates of 520% are normal at “pay day” lenders. We can all agree that such interest rates are outrageous. By comparison, the Kiva partner rates are bargains. In fact, my mortgage is 4.75% APR. The APY is 4.92% because the fixed costs aren’t included in the APR. The shortness of the loan terms and the fixed costs are what make these loans appear expensive when in fact I think they are a bargain by U.S. standards. If I borrowed $250 from Bank of America for a mortgage for 6 months and my APR was 4%, my actual APY would be something like 1500% (assuming that I still have to get an appraisal, termite inspection, origination costs, etc.). If I stretched the loan out for 30 years the APY drops to 28% with the same fixed costs. So in this example you can see that it only makes sense that a short term loan will have higher costs.

    The payday loan referenced above actually aren’t a bad deal if you pay them off in 1 week like they are supposedly designed to do. The problem is that people that need $100 today still don’t have it to pay back a week later so they keep paying $10 every week to keep the loan current. Kiva isn’t like that. From what I’ve seen, the field partners often assist the borrowers in making a budget and set a realistic repayment schedule.

    As for those who think the field partners are getting rich. HA! That’s so silly! A $250 at 33% for 12 months earn you $46. Even less if the term is 8 mos. If you write 10 loans a week you’d gross just $23,000 a year. From that, collect on 500 loans every week, pay your staff, your office expenses, your internet connection, your computers, your gas and vehicle, phones, oh yeah and yourself.

    Sustainability is the only way to go with this. If you want to offer charity, which is what many of the comments here suggest, you’ll never make an impact that can really affect the world and help lift people out of poverty.

    My hat is off to the Kiva partners. I think they are miracle workers.

    • 36. Jacob  |  11 November 2010 at 05:20

      Well said.

    • 37. KOh  |  26 November 2010 at 10:19

      Thanks for the great explanation…MFIs are being presented as usurious, but this makes a lot more sense. I appreciate the time you took to help clarify this for us all.

  • […] interest rates on the fellows blog, some good examples out of many with relevant commentary being here and here). Kiva as a non for profit partner institution does not set or influence that rate, and […]

  • […] interest rates on the fellows blog, some good examples out of many with relevant commentary being here and here). Kiva as a non for profit partner institution does not set or influence that rate, and […]

  • 40. Jürgen  |  31 October 2010 at 08:48

    This topic just “came to my mind” as it shouldn’t as Kiva is not disclosing facts. I started to research a little bit: in my country (Germany) banks according to search results in google were examined by the magazine “Finanztest” (almost no need to translate: “finance test”) in September 2010) regarding “excessive interest “. The most expensive banks in their study asked for almost 17% in case of simple not in advance agreed overdrafts of the current account. The banks who ask these rates are well known and neither have many costly branches nor a lot of staff. Off course no one can sue these banks for asking these rates and everyone who accepts them is in serious trouble, very lazy (I expect a certain center of gravity) or insane. On average it seems to be about 12%. I was surprised as in the news interest rates of 3% to 4% are offered… well for people who buy houses, have more than 20% of the needed money, can prove their ability to pay back and allow the bank to take the house if they do not manage to pay back.
    I believe that I gave my money to people who are neither lazy nor insane. So they must be in serious trouble. Certainly it is like this. Maybe I’m wrong: as long as I give money to people who want to start or enforce their business by taking the loan, it is acceptable to see reasonable and almost too high interest. The question is: what is reasonable and not too high.
    I would like to see Kiva starting research on this subject. I have doubts that a business can bear an interest-burden of more than 40% and fear that giving such loans might cause very serious problems for those who take the money: people could be caught in a kind of downward spiral, giving their lives in the effort to get out of their dependency.
    Kiva: do something, please! I need reassurance that I’m doing something good. I need to know that this approach (me – kiva – field partner – debtor) really helps the debtor and not only the field partner.

  • 41. paul wilson  |  29 October 2010 at 17:25

    i have been agonizing over my commitment to kiva and assoiciated loan partners for some time. i have much experience in the developing world. i cannot, after much consideration, support the rates of interest charged on loans from kiva partners. i agree, there must be a better model to enable those of us who have the capacity and inclination to reach out to our neighbours seeking business capital around the world. the most encouraging aspect of this ongoing discussion thread is the number of people who share my sentiments. how can we effect this change?

  • 42. Earth Ally  |  29 October 2010 at 13:47

    Though the intention may be heartfelt, I think this model is absurdly ignorant and is contributing to spreading a diseased mentality of capitalism into regions where a different form of uplifting livelihoods is needed to transform poverty. Poverty is not just a materialistic situation. Poverty seeps into the spirits and mentalities of a people for generations. Poverty is also perpetuated by many who have never known poverty. This is a very tricky reality to confront and resolve beyond the surface view of the picture. In my experience, to take economic loan strategies from the more “westernized” cultures is ridiculous to think that this is an answer to uplifting people out of poverty. According to the loan charts that Kiva has posted, Tanzania, Africa has a delinquency rate of over 62%. Why is this? What happens to these people that become delinquent? When this happens does Kiva work with these situations on deeper levels of personal understanding? Or is it dealt with in a way that now treats the “delinquent” people as if they are not worthy? Is there education and counseling provided within that 36% interest rate when a “delinquent” person’s livelihood becomes more downpressed from not being able to fulfill the agreement?

    Look at the U.S… Credit card and loan companies have devastated large amounts of people’s livelihoods in way that is impersonal to the infrastructural side effects of a capitalistic system and society that results in the “richer getting richer” and the “poorer getting poorer”. Statistics have shown that these loan systems do not necessarily work on a long term or overall basis for all of the different classes of people. Those of you who have only really known a life without poverty may never be able to fully understand the way such systems actually play a part within creating poverty, or what it is even like for a person who does not have much of an experienced relationship with money in their personal history to be expected to fully comprehend what they are actually agreeing to. What are the case studies of how these loans have effected their personal lives? Maybe many follow through with their agreements, but with what sacrifices to be able to pay back such large amounts of interest?

    In terms of solutions, maybe microfinancing organizations for poorer regions should have all of the necessary expenses needed to access these people covered, so that there is no interest rate for people within a certain financial poverty bracket. A model for this is possible. It just takes people to fully understand the implications of their actions on a full-scale level. Many from a more “westernized” background have no understanding of class and cultural differences. It saddens me to see this model being brought to such regions of the world. Please come up with a different model and solution.

    Thank you.

  • 43. Rot Bloomberg  |  24 October 2010 at 09:04

    Hi,

    I think i have over reacted. I have read a lot in the internet now on several sides and read a lot of different pro and contra arguments and I must say Kiva is a new thing but absolutely justifiable. If we want to create a long term solution there must be some incentive for local leaders. And the thorough research process which will build trust over time of Kiva and the local partners need also time and are not for free.

    I think that is the idea of capitalism, there must be an incentive otherwise it will not work, this is in the nature of human.

    also in a world where Goldman Sachs are not get stoned on the street we should not shoot against Kiva & Co.

    Best regards,

    RB

  • 44. Rot Bloomberg  |  24 October 2010 at 07:10

    I just fear that a lot of these money goes to people which apus this system and the information on kiva are by intend missliidig (portfolio yield….. I work for 15 years in a bank and never heard this term in connection with interest rates/fees which are paid by end client. if you want to include all costs then use the term which is common and understandable for everybody: “TOTAL EXPENSE RATIO”

    I just hope, that the field partnes are not donators to “Kiva” or their people behind it….

    best regards,

    Red

  • 45. Red Bloomberg  |  24 October 2010 at 06:58

    I just fear that a lot of these money goes to people which abuzze this system and the information on kiva are by intend mizzleading (portfolio yield….. I work for 15 years in a bank and never heard this term in connection with interest rates/fees which are paid by end client. if you want to include all costs then use the term which is common and understandable for everybody: “TOTAL EXPENSE RATIO”

    I just hope, that the field partnes are not donators to “Kiva” or their people behind it….

    best regards,

    Red

  • 46. Red Bloomberg  |  24 October 2010 at 06:57

    if the only cost they always claim is travelling and paper work why don’t you open a field partner office at the local townhall/food shop and people who want to lend money come to you and fill their own form and sign it. if you say opening an office costs money, yes you are right but it will not cost a 40% of X investment.

  • 47. Red Bloomberg  |  24 October 2010 at 06:57

    I do not understand why Kiva names the intereste “portfolio yield” this is a strange term, if they would use “interest and expenses” or something which is closer to the reality, most of the people would question it.

  • 48. Red Bloomberg  |  24 October 2010 at 06:56

    the local currency risk (inflation) is taken by the Kiva donor. the field partner has absolutely no credit risk exposure. this is pure “management fee”.

  • 49. olo  |  24 October 2010 at 06:51

    great stuff !!

  • 50. Minoo  |  23 October 2010 at 21:26

    I’ve been a Kiva lender since 2006.The first loan I made was delinquent! At the beginning, I didn’t even notice it because I was more excited about lending and helping others than looking at the other information. In fact, I’m not even sure the information was available. Kiva has kept on adding more information. Today was the first time I noticed that the Field Partners charge interest and I was shocked. I had assumed that Field Partners were also non-profits. It may be naive but I am disappointed. I will continue to lend the money I have in Kiva but I will not add anymore.

  • 51. Joe B  |  22 October 2010 at 01:19

    I knew that the borrowers were being charged interest, but I had no idea that the rates were so high.

    Meg, I’m having a very hard time buying your explanation. In particular, why are MFI’s spending so much time and money doing paperwork for a little $250 loan? Even if reduced paperwork causes a small increase in defaults, I (as the person providing the money and taking the risk) would find that acceptable. If my “loan” instead turns into a gift to a poor person a little more often, I’m okay with that.

    The other reason you mention is the cost of collecting payments on a weekly or daily (!!!) basis. Collecting payments daily (especially when a payment is just a few dollars) sounds completely insane! Are these borrowers so irresponsible that they can’t manage a monthly or semi-monthly payment schedule? If so, how can they possibly manage to run a business?

    With most loans, interest must be charged to cover three things: the cost of the money, the risk of losing the money, and overhead. With Kiva, I am taking care of the first two costs. If administrative costs of microloans are so outrageously high, perhaps the whole concept of microloans is flawed and instead we should just give the money away. It’s going to cost Mr. Mpaata approximately $37 to get me my $25 back; I don’t need that $25 badly enough that I need to take $37 from a poor person.

    You (and Kiva in general) make a big deal about sustainability. And I’m all for sustainability. But there’s nothing sustainable about Kiva: Kiva is charity, not a business investment. It’s not worth 36% (or more) interest to create the mere illusion of sustainability.

    (Have you considered how high interest rates are going to skyrocket once the MFI’s become “sustainable” and have to provide the money and assume the risk of loss themselves? 100%? 200%?)

    Kiva, please provide a way to search for loans based on the interest charged. I’m not really interested in funding loans where the borrower is charged more than around 10% interest; I’d rather pick a lower overhead way of helping others.

    • 52. Jay  |  14 November 2010 at 15:14

      Right on! The paperwork thing was what really hit me. Kiva can’t see the forest for the trees. Something is really wrong with this model. Somehow the model isn’t designed to suit the situation.
      Anyone providing microfinance $$$ should not be expecting a return. I’m sure most would be happy to just see the $$$ put to good use.
      To be sustainable they need develop a low cost model. It may mean fewer loans and a smaller geographic area but I’m sure it’s possible.
      I’m involved in supporting a Canadain lady who does volunteer work in Cambodia. We helped her start a bike give away program that has been taken over by Gravenhurst Rotary.
      http://rotarywheelsforlearning.blogspot.com/
      A single bike can have a tremendous impact on an entire family. This lady is involved in all kinds of projects. She gets volunteer help from all kinds of Cambodians because they see how much good she is doing.

    • 53. Udi  |  31 December 2010 at 18:39

      I agree with Joe B completely.

      This is the first time I noticed the interest rates are so high.
      As someone with some economic background and some business experience, I find it hard to believe that a business can pay 37% interest and still be profitable.
      Only people who came into sudden debt or hardship will agree to such terms.

      And the over head costs could be largely reduced by collecting on a monthly basis instead of weekly.

      Also paperwork seems a little exaggerated here.
      Prepare a 2 page simple contract, read it to the customer, sign it, and that’s it.
      It might take 30 minutes – no more.

  • […] You’ve read blogs about poor roads before. Two of my favorites are James A-G and Meg Grey’s. But this isn’t just about poor roads, this is about rising tensions, and also rising […]

  • […] You’ve read blogs about poor roads before. Two of my favorites are James A-G and Meg Grey’s. But this isn’t just about poor roads, this is about rising tensions, and also rising […]

  • 56. Sally G  |  15 October 2010 at 06:45

    Well, I read the article and all the posts, and I am now in contemplative mode. Unlike many here, I realized that the individual borrowers have always paid interest. I realized that I would not be getting the interest, that it would stay in the local community or go to Kiva. The interest rates? My first reaction would be “usury”, but it seems that there ARE valid reasons for high rates, and, as one commenter said, if you don’t trust the middleman, the only alternative is to travel around the world with lots of cash.
    OTOH, I would like to see Kiva offer an option to accept an 80% return on investment with 20% going to pay the cost of borrower training in finances, etc.—although that would mean that Kiva would have less principal to lend. The benefit would be enabling lenders/potential lenders such as me to combine lending our capital with a subsidy (in part, if not in whole) for education.
    This was certainly an informative article; I has certainly made me more aware of the complexities of microfinancing, and brings up some issues to research before I decide on a loan recipient.

  • […] challenging economic environments.  A few of my favorite past blog posts on this subject are from Meg Gray and James […]

  • 58. MIke  |  2 October 2010 at 09:30

    I have made several loans on KIVA and have been well aware of the fact that MFIs charge interest because I read the info on the webpage before lending.

  • 59. Susie  |  28 August 2010 at 20:43

    Even a rate of 36% applied to a loan of only a few hundred dollars is barely enough to cover the costs of identifying the borrowers, visiting them and filling out the forms, and keeping in touch with them (collecting funds, training,etc). Also notice that some of the borrowers mention the training they received from their lending organization in business practices, livestock management, etc. All that costs money. Here in the US we have some of the cheapest gas in the world – in Uganda for example, it’s nearly 4x more per gallon, and the roads are hardly as smooth as what we are used to so vehicles break down, wear out etc. It’s much more expensive to do business in the developing world.
    In the ideal world no one would pay interest…. but this is not that world! Interest rates from non-MIFI lenders are often as high as 100% PER MONTH… so the Kiva lenders are a pretty good deal!!

    • 60. Mikael  |  20 May 2011 at 01:37

      Information like that would be very, very useful. If I were to do microlending, I would see that as entering, as a competitor, the lending market in that place. Now, I have no experience of business, but the first thing I come to think of in the context is:
      “Where are the competitors? What are their offers?”
      If I knew that so-and-so in e.g. Uganda has the option of choosing between a 45% interest Kiva partner loan, and a 100% interest competitor’s loan I may choose another action than if the issue is that the competitors refuses to lend her because of this-or-that, and that her competitor’s will get much better deals from the usual local lenders, thereby outcompeting Ms so-and-so. In the second case I don’t see how microlending would solve anything.
      So, I’d like to see a “market evaluation” for the place in question concerning interest rates.

  • […] lot of excellent discussions by Kiva Fellows on this topic: see this post by KF9 Eva Wu, another by KF9 Meg Gray, or simply search “interest rates” on the Kiva Fellows […]

  • 62. Matt  |  17 August 2010 at 16:03

    Hi all
    just wanted to say I’m very surprised by the claims that Kiva’s process lacks transparency, and the fact that other lenders didn’t understand that they were lending to MFIs that charged interest.
    I’ve just joined Kiva and it is completely clear to me that I am providing capital at zero interest – with risk of default – to MFIs, who will in turn lend money to individuals. I understand that many charge interest – at what look like pretty high headline rates. I also understand that Kiva vets the MFIs to ensure they are not ‘usurious’ in their treatment of the borrowers; and that the costs of providing micro-finance are very high.
    When we in the North are used to mortgage interest rates of less than 5%, it certainly seems that a 30+% interest rate is high. But don’t forget that, even in places like the UK, personal credit card interest is often 20%+; and that the poorest in our own societies have to pay interest rates well above that for ‘pay-day’ loans etc. If providing loans to the poor in the UK costs that much (albeit at a profit margin) – in a climate of very low inflation and underlying bank interest rates – I can easily understand that providing them to the poor in countries with much much higher transaction costs (see the ‘bad roads’ point above) and higher inflation and interest rates will be more expensive.
    Of course, none of that means you should continue to loan via Kiva if you don’t like the borrowers paying this interest (and they are paying it, not you). As many commentators above have said, there are other ways you can use your money to alleviate poverty. Personally though, I’m convinced that trying to remove the barriers to accessing capital that face the poor, particularly in developing countries, is a hugely important problem to solve, and that this can be an effective way to do so.

    • 63. vaalea  |  17 August 2010 at 16:57

      I think Kiva has updated their website to be more transparent since the time that people initially started complaining… if you read up more on it. This is a good thing that you see it as a transparent site… they are addressing the criticisms.

    • 64. sheldon  |  7 December 2010 at 08:48

      Best post I have seen yet…as the original story was told, the interest rates are necessary to continue providing the service. Of course, in a perfect world, there would be a very low interest rate available. That is not what is important, what is important is that these people have a better chance of success with the use of a loan. These loans are not mandatory, they are simply an option to help these people grow a business in order to feed themselves and be self sufficient. The system may not be perfect, but if it is helping the majority of people, then isn’t that what it’s all about?

  • 65. Robert Purcell  |  24 June 2010 at 11:14

    I understand that small loans have a high cost and the interest enables the activity to exist. However, interest should be shared with the people putting up the money. Their funds would grow and they would have more to lend.

    • 66. Richard Middleton  |  24 June 2010 at 12:48

      If what some people already perceive as exorbitant interest is essential just to support the loan activity, imposing an additional tranche of interest to benefit the donor will just make the loan that much more unaffordable.

    • 67. vaalea  |  24 June 2010 at 12:54

      Then there is not even a SLIVER of philanthropy… because people would be loaning to make money off of these people… and what Richard said.
      I assume that the interest that is currently made, is being paid to locals and also goes back into the local economy.

    • 68. Marcel Marien  |  1 November 2010 at 03:50

      What an strange thought is that supposed to be? I think we have established here that the interest rates are paid by the borrowers whom contributers to Kiva want to help lift out of poverty. What would be the point in having them work additionally for interest that increases the funds of those who put up the money ???? The dynamics of interest taking is exactly the core disease of our present financial system and with organizations like Kiva we hope to circumvent the effects of this disease as good as possible. We are used to applying the term “interest” to many different things that have little in common with each other. Taking “interest” for covering the bare cost of an operation is absolutely acceptable, but taking “interest” for increasing the money supply of the money provider is straight forward insanity, no matter how “normal” it has become in present day society. What I would be really interested in is that Kiva makes it very transparent to everybody how far certain interest rates are indeed justified. It might well be that a 50% interest rate in one place of the world is much more justified and acceptable than a 17% interest rate in another place of the world – but I would not know how I personally could be able to find out. Appart of Kiva’s existing “field partner risk rating” I would welcome a “field partner’s interest rate appropriateness rating”. That would be one of the most important information for me in the decision of where to invest money.

  • 69. vaalea  |  19 June 2010 at 11:00

    I also found the interest rates to be high, but the high rate of loan repayment speaks to me. If those interest rates were impossibly high then they simply wouldn’t be able to pay them back.

    My first loan went to someone who has already borrowed and repayed in the past. I just don’t want to lose my FIRST $25. 😀

    I however know that this is NOT really charity. I am not giving money to anyone. I am making money available to people who otherwise would not have had access to it, to empower them to improve thier lives. And I believe the benefits trickle down to help everyone in the community. I do trust that Kiva investigates and partners with the right organizations… and as mirco-financing grows, it is tweaked and overhead/admin costs decreased.

    If you want to be GIVING money to people, donate elsewhere.. better yet-do both.

    I am also curious as asked above, what happens to borrowers who cannot repay. Are they simply black-listed for another loan.. like a bad credit rating? I haven’t had time to investigate…

    Here is a great related post… read the comments too! http://fellowsblog.kiva.org/2010/05/26/loan-vs-donation-the-importance-of-semantics/

  • 70. Andreas Kitzing  |  21 May 2010 at 14:13

    I must admit that I was shocked when I first saw the interest rate that Kiva Partners (NOT Kiva itself!) charge from their customers.

    However, if you include the inflation rate into your calculation, the interest rate becomes way more understandable. I do understand it correctly that this 36% figure stands for a NOMINAL annual interest rate?

    If you use the rule-of-thumb formula and subtract the inflation rate (19.9%, 2008 exp.)*, you get a number of approx. 16% as a REAL interest rate. Given the fact that the prime lending rate (the rate at which banks can borrow from the central bank) is about 13% in Nicaragua* and that, as Meg explained, microcredits are labor-intensive, this doesn’t strike me as such a high number.

    *Source: https://www.cia.gov/library/publications/the-world-factbook/geos/nu.html

    Please correct me if my calculation is wrong (e.g. if the 36% already picture the real interest rate).

    Muchos saludos de Alemania,
    Andreas

  • 71. Matt, Brisbane Australia  |  20 May 2010 at 18:06

    I too am a bit taken aback by the interest rates. Perhaps though, a good way of selecting a lending partner is to look at the ‘profitability’ percentage. I see some 9%, which is more than many businesses earn – so to me this implies a motive other than covering costs and allowing for steady expansion. (Albeit that they only charge 24% interest!)

    I think perhaps rather than focusing in the individual, another avenue for we lenders is to be able to search by partner first, then make a selection of entrepreneur from there.

    • 72. sudheesh nair  |  22 September 2010 at 12:47

      invest to business people they will give more than your expectations

  • […] another conservative 5% to cover these costs given Kiva fellows’ stories on the topic here and here.  The minimum interest rate MFIs must charge on average has suddenly become 16% + 2% + 5% = […]

  • 74. erick njau  |  16 May 2010 at 07:00

    KIVA IS ONE PAY LOANS FROM THE PEOPLE IN THER WORLD TO IMPROVE THEIR LIVES AND ESCAPE POVERTY.

  • 75. soulafa  |  12 May 2010 at 09:25

    One of the things that attracted me to Kiva is that they don’t charge people interest. As a Muslim, dealing in interest is forbidden.

    I was saddened to see that Kiva deals with partners who charge interest. I absolutely will not lend through a partner that charges interest.

    I wish Kiva would reconsider its stand on interest!!

    • 76. Marcel Marien  |  1 November 2010 at 10:36

      As I mentioned in another comentary above, we use the one word “interest” to refer to a wide range of banking aspects that have little in common with each other. I do not see that the Qur’an forbids covering the costs that somebody has for providing a service and I do not see that the Qur’an forbids paying somebody a wage for the service he provides (to name just two of the many ingrediences of what makes up the so-called “interest”). If it comes to that aspect of interest which just increases the money of the money provider, due to the bare fact that he provides money – I much agree that this is a diseased element of our present financial system which I’d like to circumvent as much as possible.

      I would much welcome if Kiva would make an effort towards bringing more transparancy into the activities of its partners by assessing the appropriateness of the partners’ interest rates, rating them publicly and publishing the criterials used for such assessment. Once there is transparancy individuals can – simply by granting or withholding their interaction and cooperation – contribute to building up a “selective pressure” which guides the development of enterprises and institutions into a desirable direction.

  • 77. Bishop Hooks  |  3 May 2010 at 08:46

    GOOD DAY,

    This is Mr bishophooks firm,we offer all kinds of loan to any individual who needs it for bussinses and other financail problems.so all intrested client shuol contact him for more details via email at;bishophooks07@gmail.com for more infor.

    • 78. sudheesh nair  |  22 September 2010 at 12:53

      can u arrange loan at india kerala?

  • 79. What is Kiva? « Thought soup  |  28 April 2010 at 23:38

    […] Check out the following article, written by a Kiva Fellow who worked with CEPRODEL, one of Kiva’s field partners in Nicaragua: http://fellowsblog.kiva.org/2010/01/07/bad-roads-interest-rates-and-mfi-su […]

  • 80. Rebecca  |  27 April 2010 at 13:49

    I’ve been following discussions about peak oil at theoildrum.com. Their take on interest is that in a rapidly growing economy, such as when there’s plenty of energy to fuel growth, interest makes sense. A dollar invested today is likely to be worth $1.50 tomorrow (or $1.10 etc) if real wealth is being created, and there’s room for a return on investment. In a declining economy, such as when energy supplies are dropping or people are getting older, interest doesn’t make sense any more. So I don’t think there’s a black and white answer to whether or when a particular interest rate is inappropriate. It would seem that the fact there’s a demand for these loans and the repayment rates are high might indicate the interest rates are manageable for now.

  • […] charged in microfinance, I looked back at recent blogs by Kiva Fellows about interest rates and sustainability. In comments on those blogs and on Kiva’s lender team sites, a lot of people were asking: “Do I […]

  • […] This ends up being a much better qualifier of character. It is also very expensive (see prior blog posts). If the qualification process is completed properly microfinance institutions will experience high […]

  • […] Shah wrote a nice response which I think clarifies Kiva’s position well. It also links to a blog I wrote on the interest rate dilemma which I was kind of excited about: […]

  • 84. M  |  14 April 2010 at 19:42

    Another related question is if Kiva provides zero interest money to its field partners, who lend it out, but when it’s not paid back it’s the Kiva DONOR who is out the money, right? The partner is merely out the INTEREST on the money. So it’s not clear to me how you arrive at such enormous overhead when the capital loss should be mostly absorbed by donors who think they’re lending money at zero interest with the possibilty that it won’t be paid back.

    • 85. This  |  10 July 2010 at 05:54

      ^^^^
      This.

    • 86. Pat Dolan  |  26 September 2010 at 09:39

      I was dismayed to find that the borrowers were paying such high interest. In the West, such high rates only apply to very high risk loans. As noted above, the local lender has no risk of losing the principle because the Kiva lender absorbs the loss.

      It makes more sense to me to consider this a fee to cover overhead (costs and services like training) and some profit, which is reasonable. However, I can’t tell how much of the money goes to costs and how much to profit. That is where the transparency breaks down.

  • 87. M  |  14 April 2010 at 19:26

    The problem with the logic of high overhead is you see that it necessarily leads to funding only ideas in the third world that can make what amounts to SPECTACULAR return on investments that only a high-tech startup in the West could compete with. A poor borrower can’t get money to finance an idea that will return 110 dollars for 100 dollars lent, because that won’t cover the enormous cost of borrowing at 25, 35, or 45 percent interest and fees. So there is a huge selection bias for funding ideas that have super large short term return. Is it clear those are the ideas most helpful to building a sustainable and just world? To me, it’s not clear at all, but it’s the important question here.

    • 88. This  |  10 July 2010 at 05:56

      ^^^^
      This too.

  • 89. Ramon  |  11 April 2010 at 04:38

    I have been supporting Kive Entrepeneurs for a few months now and have just learned about the interest rate being charged to entrepeneurs. I too was under the impression that these loans were free fo charges to entrepeneurs or at the very least a small charge to cover costs. However, doing a little math on one group:

    Their interest is 46%. So they have operated on Kiva for 8 months, have 595 entrepeneurs and raised $245,825.00. So that is on average $413 per entrepeneur. But hold on, that’s $190 for the Microfinancier and then hold on again, 190×595=$113050. That’s $14,131 per month to support the microfinancier and I am sure that not all loans in this case require driving out to collect everyday. If you are driving out $100 of fuel every other day then you seriously have to analyse your business structure. Let’s not forget that we are talking about real money here too, $$$$$’s not kwatcha, or soles etc. and the exchange rate works in the micro’s favour. So please explain how you can justify such high interest rates so that I may continue supporting you. I have spoken to friends who work in aid agencies worlwide and they too expressed these concerns when I mentioned Kiva. I love the concept but someone somewhere is making a mint which is not what we lenders want or like. Please pardon my ignorance if indeed so but feel I and others need to be educated or informed.

    • 90. Patrick  |  28 May 2010 at 12:44

      Ramon (11 April 2010 at 04:38) makes an excellent point backed with actual numbers! Lets play out the scenario to its logical conclusion.

      Supposing this institution’s interest rate not only is enough to cover operating costs (and defaults), and starts to make profits. Suppose the profit margin becomes so lucrative that the institution is funding “fat cat bankers” more than the individual lenders. The local next business move would be to start another institution that charges less interest and start some competition!

      So perhaps the thing to look at isn’t the interest rate itself, but whether there are any other financial institutions operating in the same geographical area.

      But what if they are price colluding instead of operating in free-market competition? Then the question becomes one of corruption (or at least other unethical business practices).

      How could you choose a financial institution that isn’t subject to these temptations? Perhaps choosing one with a smaller market capitalization is an indication that it wouldn’t have the clout to be a bully.

      In other words, being “ethical-at-a-distance” is so complex that you either have to close your eyes and trust your intermediaries, or go traveling with a wad of cash in your pocket yourself.

    • 91. sifiso w.  |  9 July 2010 at 08:07

      i guess what Ramon is sayin is very true, we need to strike a balance between operational costs, the motive and values of KIva and its lenders as well as the vulnerable borrowers who at the end of the day need the money. although i am not against the charging of interest rates, i think they should be reasonable enough to grow the businesses to that they become repeat customers, thus more business to hedge the operational costs. i also belive that the more they grow, the more they come to borrow and grow with the MFI.

  • 92. Michael  |  2 April 2010 at 08:36

    by searching ‘interest rates’ on this blog, I found several helpful articles and links. on balance, I still have confidence in the Kiva lending community and the MFI’s out there – sustainability and education are the keys, NOT profitability.

  • 93. Neil Evansan  |  1 April 2010 at 13:13

    Wether You choose to fund Kiva or other MicroFinance organizations, or not, know that Who You Are Makes a Difference.
    http://www.differencemakersinternational.org/index.php

    If you truly feel existing financial conditions in locations far removed from Your local community warrents your absence or protestations, please take the time to Make a Positive and Meaningful Difference within Your Community, both fiscally and physically. There are faaaaaaar more than a handful of opportunities to touch the life of someone in a positive way just steps from the comfrot and safety of your front door.

    May Your Light Always Shine in Its Best Fashion!

    ~ Neil ~

  • 94. Richard Middleton  |  1 April 2010 at 10:39

    I was saddened by Gordo’s comments, which seem to me to indicate that he has jumped to premature conclusions, without reading very far. This topic has developed a lively and thoughtful discussion which, to my mind at least, has made it very clear why apparently high interest rates are (a) justified (b) a good deal for the borrowers compared to other options, and (c) essential for MFIs to be sustainable. Funding Kiva out of “fat cat” profits sounds politically correct, but won’t achieve the basic objective – to build effective local institutions which are independent of external finance. His comment also seems disrespectful of the Kiva fellows, many of whom, as their journals make clear, are doing a remarkable job under often trying conditions, and probably don’t appreciate being depicted as unwitting lackeys of the capitalists. Of course, Gordo’s entitled to his opinion; meanwhile, I shall just have to increase my next loan amount to compensate for his withdrawal (he doesn’t know what good company he’s missing!).

    • 95. Gordo  |  1 April 2010 at 11:21

      Richard your clearly far more knowledgeable in these matters than me… so I bow to your superiority.

      But I need more convincing. FYI I have read this entire article along with responses. I have also read all of the Kiva pages.

      On the About page there is a list of supporters. These are the big guns I referred to. Now from those I can see straight away that they have donated millions of dollars in cash to Kiva to help with things, on top which there is help with advertising, transaction fees, legal fees, accounting fees, plus all manner of things.

      Can you tell me why given all this aid, that Kiva still needs to charge the end users such high fees ?

      What is to stop Kiva and other MFI’s from simply getting a loan from a abank at say 20% and lending out at 40% … what do they need me for ?

      Educate me.

  • 96. Gordo  |  1 April 2010 at 10:14

    I was invited to join Kiva today by a friend. It sounded great at first, and when I saw all the big name corporations lending their support I became more interested.

    Now I’m reading about these rip off interest rates I feel it’s just another scam. So sad that big name players feel they can use little guys to earn browny points.

    If these overheads are so high somebody needs to rethink how you are doing things. Whatever overheads remain can be covered by the corporations huge profits … they will write it off against tax in any case.

    Asking people like me for free funds so you can make a nice business is not on.

    • 97. Alex Tuck  |  14 April 2010 at 08:57

      I’m the Founder and Program Manager of a small, start-up NGO, called People Helping People Global. We are in the general business of economic development, but micro-lending is an aspect of our multi-faceted approach to eradicating extreme poverty.

      I just wanted to correct the facts here about Kiva. Kiva does not earn any of the interest income. If you go to “How to Become a Field Partner” section of their website, you can see the following information about how the partner relationship works:

      “Kiva provides MFIs 0% interest US dollar debt capital in exchange for client impact transparency on the internet. MFIs on-lend this capital at prevailing interest rates and keep the interest income. Losses arising from client default are borne by Kiva’s social investor.”

      Additionally, you can view their 990 form and see that nearly all of its income comes from public support (e.g., grants, donations).

      While I do have some fundamental disagreements with the structure of Kiva’s business, they are providing free loans to MFIs, which creates jobs and provides millions of dollars in loan money to individuals who have never had access to loans in the past. Something that I would like to see from them is a portion of their funds going towards subsidizing administrative costs for loans that require these usurious rates. But this goes somewhat against their current business model of MFI sustainability.

      Anyway, I hope this clears up the discussion a bit. All in all, Kiva gets a bad rep. I believe it’s mainly because they are the biggest player in the most popular social progress movement at the moment. Micro-finance can be an incredible tool for eradicating extreme poverty, but it needs a bit of time to be fine-tuned. Kiva, Grameen, Microplace, etc. are helping out a ton by putting it on the map.

  • 98. Dan  |  25 March 2010 at 18:14

    I was startled by the fees and interest charges that Luis Humberto was charges. His project, two Oxen, has been repaid. I felt that the explanation offered, bad roads, held a lot of weight with me. Thanks for taking the time and effort Kiva. I appreciate knowing the pitfalls and reasons behind them.

  • […] mottos last year- and the risk of being robbed. For more on that.. you can start your reading with, Bad Roads, Interst Rates, and MFI sustainability by Kiva Fellow Meg Gray, KF9 Nicaragua and then search interest rates on the Kiva Fellows blog […]

  • […] Why do we need Microfinance Institutions (MFIs) and Interest rates? Published March 10, 2010 Uncategorized Leave a Comment A blog in response to comments under “Bad Roads, Interest Rates, and MFI Sustainability” […]

  • […] 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 […]

  • […] Regarding the third point about photos, yes I would agree that the photo of a bunch of group members in one of Arariwa’s or Emprender’s white-walled classrooms isn’t as sexy as a photo of a farmer in his fields, or a pot-maker in his workshop, but group loans are a way for the microfinance institution to be more sustainable, especially considering the high costs an MFI faces. […]

    • 103. Jeff Bochsler  |  30 March 2011 at 14:52

      Good point. A quick answer to better understand why the pictures aren’t always to Hollywood quality, location, and emotion. Arariwa has a main office in few main cities/towns in Peru. The pictures are taken in Arariwa’s classrooms where the more local client community banks come monthly to meet with their loan officer, make their payments, and learn. These meetings are usually at night after work. They are tired. Their kids with them are tired. So don’t make your loan judgement based off the picture. This noted, from what I can see on the ground floor, this is the best and most efficient system for keeping costs down. Moreover, it is best for the borrowers to have a consistent, familiar environment to which to visit aiding in comfortability and progress. For community banks beyond the city borders, they have a common monthly meeting place in their local pueblo. I hope this helps!

  • […] loaded with microfinance banks. For a fuller treatment, see recent blog posts by Peter, Eva, and Meg. Possibly related posts: (automatically generated)Is a Kiva loan really interest free?Kiva, […]

  • […] A blog in response to comments under “Bad Roads, Interest Rates, and MFI Sustainability” […]

  • 106. Moo  |  22 February 2010 at 20:56

    I’ve just made my last donation to Kiva. I was under the impression that these loans were free. While I understand the cost of making a loan there should be a fixed cost and give the lenders the option of covering that amount.

    Kiva, you need to be more upfront about these costs and work out other ways to cover it. 30-40% is ridiculous for the lenders to bear

    • 107. Rob  |  26 February 2010 at 15:11

      While I respect your concerns for the well-being of the borrowers, it’s worth mentioning that the MFI itself needs to attain self-sufficiency to continue offering loans. How long would an MFI survive if it generated absolutely no income? Not long at all and there would be no means of delivering loans.

      Employees at the MFI don’t work for free. They’re often locals who need to earn a living as much as any borrower. MFIs incur real costs which include salaries, mandatory benefits, government taxes, fees and permits, office space, telephones, internet, computers, transportation, etc.

      Also keep in mind that most loan terms are less than a year and interest rates are quoted as annual rates. Let’s look at a $400 loan for 6 months. At 36% annual interest, that’s 3% monthly or a total of $72 in interest over the life of the loan ($12/month x 6 months).

      I’d also point out that many MFIs are charged interest by traditional funders other than Kiva. They can, at most, derive 1/3 of capital from Kiva at no interest. The other 2/3rd generally has a cost associated with it which must be, at a minimum, passed through to borrowers.

      Again, I understand your concerns is for the borrower, but it’s important to note that they are being provided a service otherwise unavailable and which can be costly. Charity itself is a wonderful thing but it’s not a sustainable practice. Keep in mind that your $25 loan is fully repaid to you. The process of administering it doesn’t happen for free. Many people work very hard to do this, but they have to earn a living too.

    • 108. Andy  |  25 March 2010 at 11:27

      Rob, I’m afraid that I totally disagree with you. We, in the West are so used to everything being based on this market economy model that we cannot see any other way of doing it. That is not the case!

      The rich have the responsibility to help the poor. if we turn that into a business venture we are completely missing the point!

      There ARE Kiva partners that do not charge interest. Those are the ones that I will be supporting.

  • 109. Hugues Dallaire  |  22 February 2010 at 04:38

    Before I started to loan through Kiva, I checked the field partners data on Kiva. As many of you, I was appealed at the interest rates charged by those organizations. However, a look at their profitability convinced me to read more about microfinance.

    I found a good comparison in an article (at
    http://microcapitalmonitor.com/cblog/index.php?/archives/129-Microfinance-Interest-Rates-as-a-Function-of-Transaction-Costs.html) describing the costs involved for a big lender to make a single loan of $1,000,000 compared to those of a microlender making 10,000 loans of $100 each. This was an eye opener for me, and it is consistent with Meg’s article.

    Maybe some of us were too enthusiast to start helping and forgot to “read the manual”, maybe Kiva staff was too eager to share their passion and put only the nice stuff up front, but the information on interest rates was always available for all to see.

    I don’t have much of a way with words, but I would urge those who want to quit to do their homework first so they can make an informed decision.

    I believe that we are making a difference.

  • 110. Graeme GARNER  |  18 February 2010 at 00:31

    Ursury is the term I would use. I have donated to 23 clients. I was under the misapprehension that this money was going to the applicants not to set up money making by these MFIs which are growing daily. I find it abhorrent that such practices are used against the poor trying to escape activity.I feel it is a rip-off. I will not donate any more to such an organisation.

  • 111. Mary Burg  |  16 February 2010 at 15:46

    I’ve travel in a number of third world countries where the difference between obtaining a loan is the local money lender or with an org–non-profit of course or a church group which provides a loan at a high rate of interest justified just as you have it this article. What I found is it is a money making proposition for the NGO or church under the quise of helping the”poor.” Actually it is a revenue stream for the NGO. check out orgs like World Vision, Save the Children etc. If the org needs more than 10per cent interest check the org out!! The micro-loan is a money making project

  • 112. matt clayton  |  15 February 2010 at 07:41

    I sent a question to Kiva today asking how a loan at 30-50% interest benefits the entrepreneur. If they actually respond I will post it here. It seems to me that at the least Kiva could partner with one of these organizations and offer zero percent financing and then advertise that loan to the donors with minimum donation fees to cover the admin cost. Im sure if they offered that option as an alternative that there would be plenty of donors willing to cover the admin cost. I logged on today to deposit more funds and loan out more money but was floored when I saw that the agency handling the loan was charging 50% on the loan. If their default rates are so low maybe I should go into banking. I could charge a measly 20% interest and call it charity.

    • 113. Trevor Watson  |  16 February 2010 at 06:11

      I hear you Matt

      I’m sure if the recipients of these loans were given access to interest fee loans they would be happy to travel to make repayments – and the costs of the intermediaries would evaporate such that they could be adequately met by minimal donations.

      At 30 – 50% interest no wonder these organisations have to employ debt collectors to travel the country ensuring the repayments are met.

  • 114. In Defense of “High” MFI Interest Rates - Anecdoted  |  14 February 2010 at 05:57

    […] read Meg’s excellent blog post “Bad Roads, Interest Rates, and MFI Sustainability” and the ensuing comments from Kiva lenders, I admit that I was rather baffled. Particularly […]

  • […] read Meg’s excellent blog post “Bad Roads, Interest Rates, and MFI Sustainability” and the ensuing comments from Kiva lenders, I admit that I was rather baffled. Particularly […]

  • 116. Gilda M.  |  13 February 2010 at 23:10

    I am disappointed by the poor transparency of Kiva’s fund collecting procedures, which had made me believe that the money I donate goes directly to the persons asking for a loan, while only by chance I have learn that it goes to MFI which charge interest rates in order to cover their costs. I would at least appreciate the possibility of chosing whether the interest rates must be charged to borrower or to the lender.

  • 117. John H.  |  13 February 2010 at 12:35

    I think the interest rate is high, and Kiva should be working with the loaning organizations to gradually reduce it. I don’t think it should ever be higher than 36% to the loan recipient. I understand that there is a lot of overhead in these microloans, especially when loan payments are made frequently, in person. I think one approach would be to allow the Kiva lender the option of paying a percentage of the financing costs so the interest charged to the borrower could be reduced to say 12%. I personally have dificulties with high interest rates charged Kiva borrowers, and it seems the poorer the people, the higher they are charged (even in North America).

  • 118. Israrul Haque  |  13 February 2010 at 01:29

    Thanks to all those who have realised and understood the element of exploitation in this loan processing.Well I have no doubt about KIVA’s intention to serve the have-nots and the underprivileged but the only request I will make to its organizers is to change the process. The interest-base debt-serving process should be change to profit base. All the entrepreneurs who have receive the micro finance loans must share the profit after the operational result of their enterprise at any agreed profit ratio and must return their loans timely to get a bettercredit rating for receiving more loans in the future. In case of losses KIVA should bear it and assess the reason for their losses and give them some business advises to overcome these losses in the future. I will request all the philanthropists and donors to carry on their donations if KIVA is able to reorient its process.

    • 119. Andy  |  25 March 2010 at 11:17

      I like this idea of setting a tax on subsequent profits rather than charging for the loan. This comes from fruitfulness rather than from exploitation.

  • 120. Sisir  |  12 February 2010 at 21:28

    This was an eye-opener for me… I too thought i was giving interest free loans.I understand that MFI’s have operating costs and they have to get them from somewhere. My only issue is why are Interest rates not mentioned anywhere in Kiva and all along the lending process.
    Kiva should not have hidden these facts. People who reason with their explanation about Interest rates and understand how Microfinancing works only would lend.
    I believe Kiva community can come up with some creative ideas for MFI’s to reduce their costs and lenders like myself will be even willing to bear some of the costs. What’s needed is Kiva willing to work with MFI’s on reducing the interest rates they charge.

    I was reading journals posted by Viviana from Peru and was puzzled to see that all the borrowers she wrote about yesterday decided to stop working with the MFI after repaying one or two loans. Now i can think of the probable reason…. Interest Rate.

  • 121. Neil Evansan  |  12 February 2010 at 03:05

    It’s interesting reading the many comments since my post 3 days ago, especially the indignation from those who obviously did no real research into the use of their money or who “thought” they were giving interest-free loans. This looks and sounds to me more like a use for disposable income rather than a real loan.

    Of the many of the “philantropers” posting their disgust, I’m curious how many are interested in actively looking inside their own local communities to help fund their “poor” with loans of equilvilantly meaningful size and intent, say, $4,000 for a new computer and software for a struggling Graphic Artist, or $2500 for a bicycle rental and repair shop hit by the recession, maybe even $1000 for a local kid to start a landscaping service for the neighborhood elderly. I’m sure there are MANY people within 1-to-5 miles of your location who would welcome the asistance of a monied and well-intended benefactor. I know I’m seeing more and more shops of all descriptions closing at an acelerating rate.

    As the old standard says – Think Globally, Act Locally.

    • 122. Robin Bongers  |  12 February 2010 at 04:04

      Who obviously did no real research? Don’t you think Kiva should give this information, rather than suggesting that they only ask a small percentage to maintain their organisation? Just to show you a loan confirmation:

      “Thank you for your loan to a Kiva entrepreneur! 100% of every dollar you have loaned will be used by your entrepreneur to build their business.”

      No word whatsoever on interest rates.

    • 123. Jacob Schwartz  |  14 February 2010 at 15:22

      I agree with Neil – there’s plenty of transparency about interest rates on Kiva loans.

      When you look at an entrepreneur’s loan page, there’s a whole section on the field partner on the right side of the page. There’s even a line that states whether interest and fees are charged. When you click to find out more about a field partner, there’s a table titled “Borrowing Cost Comparison” where the interest rate statistics are listed.

      For my first loan grant, I picked the entrepreneur based on the field partner’s performance. I suggest that others do the same, and take some responsibility for their lending actions.

    • 124. Robin Bongers  |  14 February 2010 at 23:00

      So, how long have you been lendiing through Kiva? ;o)

    • 125. Trevor Watson  |  16 February 2010 at 05:58

      “especially the indignation from those who obviously did no real research into the use of their money or who “thought” they were giving interest-free loans.”

      mm.. I get informed that the recipient of my loan has made a repayment of all or part of the capital I lent to them – I don’t receive any interest component – that’s an interest free loan. Why am I pissed – because I thought I was making an interest free loan to a deserving individual – instead I’m making an interest free loan to a loan sharking organisation.

      “Of the many of the “philantropers” posting their disgust, I’m curious how many are interested in actively looking inside their own local communities to help fund their “poor””

      I’m posting my disgust because I’ve been misled & the proportion of my philanthropy that is local has no bearing on this.

    • 126. Andy  |  25 March 2010 at 11:14

      Trevor, I think that you have hit the nail on the head; we thought that we were giving an interest-free loan to a deserving individual but in fact we are giving an interest-free loan to a loan-shark organisation.

  • 127. Victor Paterno  |  12 February 2010 at 00:45

    I am from the Philippines and have been studying the microfinance industry with an eye to using technology to reduce MFI operating costs.

    36% operating cost is average globally, and according to Kiva, 50% for my country. When you have to visit borrowers once a week over 6 months to collect $5 on a $100 loan, it gets expensive. If you try to reduce frequency to save costs, your repayment rate goes down. While 50% sounds high to those with access to credit, it is cheap compared to the local loansharks, who charge 20% a week.

    There is an excellent book, “The Economics of Microfinance” that provides a well-researched and intellectually rigorous discussionof the problem. Can’t recommend it enough for those with an interest in how microfinance works.

  • 128. Ann  |  11 February 2010 at 13:18

    One approach Iwoudl liek tKiva to offer to lenders is the abilty to sort loans by the interest rate that will be charged to the person who gets the loan. It woudl then be easier for me to direct my loans (as I do now but with a lot of effort!) to loans through groups that have lower interest rates.

    This would encourage the agencies to keep their rates low and allow those of us making loans to easily make informed choices related to this issue.

  • 129. Tilly  |  11 February 2010 at 11:02

    As a potential lender, I am hesitant now to continue. It seems that the business practices have not been very transparent in regards to interest charged. Borrowers are approved and money lent, it seems, according to the MFI’s decisions, so an individual’s contribution does not go to their chosen borrower, rather into a pool of funds. I’m not sure that is a bad thing, but should be made clear to lenders. Actual operating costs of the MFI’s obviously need to be covered, but within reason. How do you calculate those costs? Still, 36% and even higher interest rates seem extremely high.

  • 130. Moises Navarro  |  11 February 2010 at 10:12

    Estimado Sres. de KIVA, la verdad es que para que funcione este proyecto de financiamiento con aras de atacar la pobreza tiene que existir un capital semilla, este, debe de ser aplicado a su objtivo con reserva de ganacia para gastos administrativo, pero lo que esta pasando, Ej: El Viejo, Chinandega, es que existe una financiera que dice ser anti lucro, pero es lo contrario, el objetivo es lucrativo. De hecho considero que el informe es escueto, no se logran determinar las bases de un informe que al parecer no analizo ademas de un camino rural, las memorias de calculo o justificaciones para cobros excagerados, que ojo, no se reflejan en el contenido del documento legal (escritura), eso implica una ilegalidad. Facilitarle un capital semilla a un ganadero de occidente, no a un 36%, sino a un 50% o mas, es imposible de ser rentable para el campesino, es posible que campesino lo pague, pero èste no optuvo gancia, sino que fue un empleado indirecto de estas financiera, porque con el esfuerzo y sudor e su frente lucho y sacrifico a su familia para pagar y sino paga pierde su pequeña propieda etc. Esto es triste, LOS DONANTES O DIRECTORES DE KIVA, deben hacer un analisis prfesional, con analisis profundos, para que ese dinero no sea retable para la financiera, sino que sea sostenible y para el productor debe de ser un capital semilla renovable. Saludos.

  • 131. David  |  11 February 2010 at 08:45

    We seem to be comparing the system to our system, but it’s totally different. If we get a payday loan at 35%, or a high-interest credit card, and we don’t pay it back on time, it keeps compounding, and we can get into debt. That debt stays with you unless you declare personal bankruptcy. But with MFIs, the situation is different. The people receiving the loans have literally no money to start out with. When they receive a high-interest loan, one of two things happens. Either their business takes off and makes more money, in which case they can pay back even that high interest loan, or else their business expansion fails. In that case, unlike in the States, that person is no worse off than before—they still have no money! It’s the MFI that eats the cost of the defaulted loan. In other words, the successful loans pay for the sustainability of the MFI in that country, including that MFI’s ability to cover the cost of a certain percentage of failed loans. The fact that Kiva’s repayment rate is in excess of 90% tells me that it’s a good system. More generally, this is how micro-finance around the world tends to work. It’s so different that the West, where high interest can cripple. In the developing world, it’s lack of initial capital that cripples. If you have 1$ in a mattress, and you can suddenly get 100$, you can do things with your business that would have been unthinkable before—you can grow it rapidly, even rapidly enough to pay back high-interst loans. And remember, the terms of these loans are often less than a year. Interest simply doesn’t have the time to compound sky-high in such a short time. Microfinance models are one of the leading solutions to global poverty…there’s a reason Muhammad Yunus won the Nobel Prize in economics. If anyone is really sickened by “what Kiva is doing,” *please* find another organization that is helping to alleviate poverty in the developing world. Don’t let your feelings about one organization prevent you from helping those who desperately need it!

    • 132. Mark  |  11 February 2010 at 14:45

      David, I agree with many of your points. One of the best poverty-reducing tools for the developing world is to provide them capital.

      However, it is not as simple as saying they have nothing so if they fail there is no personal loss to them. Many of these MFI’s lend to groups. so if a borrower gets into trouble, there is a huge social pressure to pay his loan back so that his fellow group members aren’t held accountable for his loan. This means he might try to get funds elsewhere (loan shark?) to pay off the loan because of the social stigma attached.

      Also, if the lack of capital in a developing market (aka inefficient marketplace) means someone can borrow at 35% and still make a higher return than that, then I am all for that kind of development. I’m just not convinced that there is enough research to prove this is the point.

      There has been a push towards SME’s. Small and medium enterprises. Creating businesses that hire people and are self sufficient should be the goal.

      Glamorizing “micro institutions” to intrigue the rich world to give money is not a bad thing (necessarily). However, it’s certainly not the end game either. I think the result in ending poverty is widely overstated.

  • 133. Trevor Watson  |  11 February 2010 at 05:32

    I didn’t realise that the mfi’s were charging the borrowers fees or interest – I’m not going to lend through kiva again & I’ll be withdrawing the funds that I’ve so far been relending. I feel like I’ve been defrauded by kiva – this is bullshit – you’ve managed to turn a humanitarian gesture into a loan sharking operation. What you should’ve done was ask for a loan amount (which was repayable) and a percentage (a donation/non repayable) to cover the costs in administering the loan. I’m sickened.

  • 134. ana talbot meling  |  10 February 2010 at 11:39

    I am also very worried about this high interest level. I can’t see that it can be justified. One thing that seems to be lacking is competition from other lenders to force the lending organisations to cut their costs. Is there any way to intoduce this? Can we lenders contibute to this?

  • 135. Ann  |  10 February 2010 at 11:34

    I think the indignation comes from being duped. If I wanted to support micro lending institutes I could have given to them directly. I didn’t need Kiva to do that.

    I wanted to loan interest free money to Asgar so he could buy a goat or Felipe so she could buy a fax machine for her Internet cafe. I didn’t want to support a “Payday Loans” in a developing country.

    The model works because it is deceptive. If Kiva said upfront and loudly that the people you see on the website are not the actual people you will be lending to and that you are loaning money to lending institutes so that they can lend it out to people at high interest rates, I don’t think as many people would be lending.

    I don’t see why I gave money to Kiva. All they seem to be is a marketing ploy to get money for lending institutes.

    Maybe they are doing good; maybe they aren’t. But it’s not what I thought it was.

    • 136. Robin Bongers  |  10 February 2010 at 23:02

      My point exactly. Kiva hasn’t been open about this at all. Their story: You lend, Asgar borrows, waiving interest and risk are (the only) lender’s charities, and – stressed – 100% of the money goes to Asgar! Until recently, the fact that field partner charges interest was nowhere to be found! So, I really thought that Asgar could develop his business without a big interest burden hanging on his neck. Naive!

  • 137. CPinHI  |  10 February 2010 at 11:20

    I agree that microfinance programs need to sustain themselves. Any lending program that relies on philanthropy is inherently unstable: what happens if, say, major industrial countries go through the biggest recession since the Great Depression, and charitable giving dries up? Programs would have to be shut down, perhaps permanently. I know–I work in a grant-based non-profit, and we have a couple far-flung offices that have opened and closed at least 3 times in the last 20 years (closed now!). While the interest rate seem usurious, these are small loans with high administrative costs (and possibly risk…I’m not sure how risk is treated in microfinance). So long as borrowers are shown and made to understand what their payment schedule is going to be, there is no problem.

  • 138. Richard Middleton  |  10 February 2010 at 10:34

    I spent about 35 years of my career trying to get things to work in developing countries, and, while I understand the indignation of those who think the interest rates charged by KIVA’s partners are too high, I think they are wrong.
    In the long term, for sustainability, it is not good enough to get philanthropists to cover administrative and other overhead costs ; that’s a short-term fix that undermines local talent. These costs should be covered by the local MFI, and therefore (if the MFI is not to be eternally dependent on charity) rolled into the interest rates it charges. I absolutely support suggestions to build local capability – but that also has a high cost in terms of training, supplies, and support. Look at the development literature on “empowerment” – an excellent concept that too often was used to justify landing immense responsibilities on villages who had great difficulty in meeting them (the same thing tended to happen in the early stages of the “Women in Development” movement – beware of buzzwords!).
    There are usually a host of reasons why communities are poor, and building capability to solve that is a matter of years rather than undertaking one or two projects. KIVA and its local partners may not be the ideal solution, but at least this model seems to work – as long as KIVA understands that its objective should be to put itself out of business and let self-sustaining local MFIs take over!

    • 139. Mark  |  10 February 2010 at 11:27

      Kiva gives its money to self-sustaining MFI’s. It’s not a competitor so much as a cheap funding source to help those MFI’s be self-sustaining at a lower interest rate than would otherwise be possible. The break-even is lower because of Kiva and this is good for both the MFI’s and the borrowers.

      Again, my question is how we know that even self-sustaining MFI’s are actually beneficial in reducing poverty. I believe there are conflicting studies, but would love for someone to give me some credible sources that say otherwise (I truly am hoping they are out there).

      Can a mother in bangladesh really sell bananas and make the 33% return necessary to pay off her debt and it actually be beneficial? I’d love to know how to make a 33% return selling bananas.

      It seems to me that “microfinance” has become quite the buzz word in its own right.

      I’m trying not to be negative but too many people are giving superficial answers to a very legitimate question.

    • 140. Andy  |  11 February 2010 at 12:34

      Richard, I fully agree with you that building capacity in the communities is vital to its long-term sustainability. Over the 16 years that I worked in Africa, I trained and mentored about a dozen people in various aspects of the jobs that I did. It is gratifying to see how the skills I taught them have enabled them to care for their families in a way that lending or even giving financially could never do.

      To say that high interest rates need to be charged by MFIs so that they can prosper commercially and become sustainable is to ignore the fact that our world is so unbalanced and exploited by the West. Even here in the West, we are discovering that our economic systems, built on interest and continued growth, are fundamentally flawed. We need to get rid of the system of charging interest. All money is debt. To encourage developing countries to build systems based on these same, flawed principles is to invite failure.

      I do not see it so much as philanthropy but rather as a [partial] repayment of the debt that we owe to the developing world for the exploitation and commercial colonisation that we have inflicted on them over the years.

      I will be looking more closely at the interest rates charged by the partner organisations and call upon Kiva to set a limit to the amount of interest that their MFI partners are allowed to charge.

      Perhaps we should start a campaign within the organisation calling for a reform of the rules! Zero interest.

  • 141. nancy  |  10 February 2010 at 09:19

    I would like to know the year, make, and model of Meg’s car…I agree with above postings, but would understand a 10% limit…and the math is easy for recipients to figure out as well…I like the idea of less oversight, building trust, and perhaps a village person keeping books…then they could come to a central place, or be visited, say once a month…

  • 142. Lori Dahl  |  10 February 2010 at 09:02

    I will be pulling out of Kiva as well. I originally started lending because I thought I was giving a leg-up to people who just needed an economic boost. As a lender, I would have most certainly been willing to accept a 70-75% repayment of loan amounts, but did not realize I was party to exploiting these hard-working people on yet another level. I will find a better way to help.

  • 143. Mark  |  10 February 2010 at 08:47

    Thanks Meg, all are fair points. This is an issue I’ve been struggling with and I WANT to believe that microfinance is an unharmful policy tool.

    However, I’d like to see the same analysis done from the borrower’s perspective. I completely agree that MFI’s have to charge relatively high interest rates. But can borrowers pay these rates and it still be an effective poverty alleviation tool? I’ve asked many people, and all immediately point me to the excellent pay back rates. So it must be effective because borrowers are not delinquent? But where does this money come from? No one can support the fact that wealth is created by the enterprises rather than a borrower who gets funds from a different lending source to pay off the initial loan. I believe there are some studies that suggest this may indeed be happening?

    I really want to believe, but I’m having a hard part getting past the logic of how enterprises could be so profitable as to pay off a 33%+ interest rate loan in countries with little economic infrastructure and domestic wealth.

    If you have any suggestions on reading materials for me, please send them! Thanks!!

    • 144. Andy  |  10 February 2010 at 09:50

      Mark

      Try:
      moneyasdebt.net
      or
      chrismartenson.com

      for good explanations of why we need to eschew interest to be sustainable.

    • 145. Mark  |  10 February 2010 at 11:19

      Andy, thanks for the links, but this is not my point. Not all debt is bad. Debt can be a useful catalyst to help businesses grow. in order for this to be the case, however, the net return earned by the business has to be higher than the cost of capital (i.e. interest rate) on the debt.

      The point I’m trying to make is that:

      1. I understand why MFI’s charge high interest. Not offended by it because they have to in order to be sustainable. I just question how much research is out there to prove that this is effective if one’s goal is to reduce poverty (as opposed to possibly making it worse).

      2. American businesses can get loans at cheap rates, say 8%, so it is quite possible to make a return > 8% and therefore the loans are helpful catalysts for business growth and creation of wealth.

      3. Borrowers of microfinance loans are in developing countries. How can they generate a 33%+ return on their business. Is it really possible, just because developing markets are inefficient? Yes, the majority of borrowers pay back their loans. Many are in group lending situations with intense social pressure. How do we know they are not borrowing from predatory money lenders to pay back their group loans borrowed from an MFI? It seems intuitively difficult to believe that 99% of MFI borrowers have businesses that generate returns > 33%.

      Still trying to learn with an open mind. I’m just afraid there is a lot of groupthink in microfinance.

    • 146. Adam Kemmis Betty  |  12 February 2010 at 10:04

      Mark, I´d suggest Richard Rosenberg´s short paper for CGAP on whether microfinance really helps the poor.

      A couple of comments on the points you raised.

      Can a microentrepreneur make a sufficient return on their investment to cover the interest cost? I´m sure the answer varies; Rosenberg suggests that we might be missing something by focusing on this point. The really value of microloans to the poor may not be in business capital, but in helping them smoothe consumption, make large purchases and manage their day-to-day finances. Poor people all over the world use a variety of formal and informal financial tools to do this, including microfinance.

      Are debtors really able to pay back or they simply taking out other loans to cover the repayments? As you say, it can be hard to know, at least in specific cases, and could hide the real level of debt. However, this could only last for some time before borrowers ran into trouble with repayments. High repayment rates over the long term in microfinace (and continued demand) indicate that borrowers are indeed able to repay.

  • 147. Ann  |  10 February 2010 at 08:14

    I wanted to note that 36% is the average interest rate. I didn’t have to look long to find some lenders charging 57% interest.

    When I started lending, I thought I was making loans to the actual people that I read about and that I was lending it interest free. Now I find out what I’m actually doing is loaning money to a bank that can charge what ever interest they want and it’s not the actual people that I read about that gets the loan.

  • 148. Samir Abdulaziz  |  10 February 2010 at 08:01

    I agree with all those who say charging interest is wrong. I am no longer going to contribute, because instead of helping, I believe we are hurting them. I don’t charge interest on my money, but why should they charge. They should maybe charge a very minimal service fee to us not to them…and Allah knows best.

  • 149. Peter Monovan  |  10 February 2010 at 07:07

    I am a potential provider of funds but must say that 36% interest has stopped me from involvement because I think its an exploitative rate.
    I understand the need for field operatives to cover expenses and make a profit but there has to be a policy in effect to curb excessive charges. Without a policy field people have free reign to profit excessively on the backs of the poor and of generous donors. If there was a ceiling negotiated, than field people would work to reduce their administrative costs.
    The original post suggests that all contacts are miles of bad roar with hours of paperwork and all done singly. I doubt that is always true.
    Limiting interest rates would encourage what i understood was general, loans to groups with the group members interdependently holding their own daily or weekly meetings,and for field people to operate in a economical manner.

  • 150. Peter Sommerfeld  |  10 February 2010 at 07:01

    Definitely have to agree with Israrul Haque, the interest should not be charged. If the donors are such giving “givers”, they should realize that while most other forms of donation return 0% of the donation financially, the Kiva donors should be happy with, say 80% returned.

    Here in developed countries, people are outraged that credit companies charge 18%+, which is still much less than these Kiva loans. If credit card debt can send people in developed countries to the poorhouse, I can only imagine what it could do in underdeveloped countries.

  • 151. Robin Bongers  |  10 February 2010 at 03:58

    This is the first time I learned about Kiva partners charging interest. I can understand why this subject has been in the ‘quiet zone’ for so long, because a lot of lenders here would be shocked if they knew that the money they are lending (without expecting any interest) to relieve poverty is actually topped with a percentage up to 36% (!!!!) by the field partner. I don’t want to be part of a system that exploits the need for fundings in this way, and I don’t want to lend money in order for field partners to charge such excessive costs. I expect Kiva to be completely open about these rates, they should be displayed prominently when you select your lendings! I was a very enthusiast lender, but this means a big scratch on Kiva’s reputation and credibility.

  • 152. paul wilson  |  9 February 2010 at 15:04

    i have been a kiva lender for the past year. i was quite shocked to recently learn the average rates of interest charged to loan reipients. considering the large number of kiva partner organizations in so many different locations, i find it difficult to accept that the majority of them have such similar operating costs reuslting in such high rates of interest charged to recipients. in some business sectors this would be considered to be collusion. i would like to request that kiva administrators pressure all partner groups to file transparent accounting documents. i would like to see all loan recipients have access to credit at reasonable rates of interest relative to local costs. an average of 36% interest seems extremely high to me in spite of the rational provided.

  • 153. Jacob Schwartz  |  9 February 2010 at 14:56

    Thanks for this glimpse into the mechanics of micro-financing. When I first heard about these kinds of loans a few years ago (quite apart from Kiva’s money sourcing role), what most interested me was introducing ultra poor and uneducated people to a financial world they had some control over. It seems to me that people who benefit most from micro-financing aren’t the ones looking for a hand-out. I think they should deal with a little interest, as long as it doesn’t become onerous.

    It seems to me that if the admin costs are too high, there might be room to reduce them through innovation. Instead of visiting clients personally every time to collect money, perhaps text message payments should be used with visits less often.

    On the other hand, if a borrower needs the regularity of someone visiting every day, perhaps they should be paying for that service.

    • 154. Sally G  |  15 October 2010 at 06:33

      Text message payments [payment-reminder visits, I suspect is what was meant]? What sort of text-messaging is available in most of these places? While well-intentioned, I suspect that this comment was not well-considered. OTOH, I could be far behind the times; please correct me if so.

    • 155. Jacob Schwartz  |  16 October 2010 at 17:49

      Sally G – I believe that mobile phones are pretty wide-spread in rural African locations, as they are in most 3rd world places… The 3rd world was able to jump straight from no phone services to mobile service, because of lower infrastructure costs.

      SMS’s can actually be used to pay for things, not just communicate. Telco’s can set up special phone numbers that will debit credit from the mobile phone’s service when an SMS is received. This technology already exists for transactions such as paid parking.

  • 156. Brett Little  |  9 February 2010 at 07:30

    I would you are going to be careful when you use the word sustainable. I see what context you are using it in as in financial one. I would like to see Kiva also put a focus on true sustainability with it’s clients business. That is the Kiva clients are profitable but will also be building up the local community they work in as well as maintaining and even restoring the local ecology. If their businesses are merely only profitable but weigh down on the natural or human community then i think Kiva is failing. (example, farmers purchasing pesticides to grow crops, making a short term profit, but poising themselves, others and the land, not good!)

  • 157. Claus Wall  |  9 February 2010 at 07:24

    I have read the many comments on interest rates. My opinion is that KIVA should not charge high interest rates. How often have developed countries kept down the poor. I believe that all loans should have an upper limit of no more than 10% per annum.
    How can this be done? KIVA and its members need to bear the difference with their contributions. KIVA needs to negotiate interest rates with microfinancing partners before they do business with them. The business practice of seeing clients daily or weekly should be discontinued. Once a month is sufficient. This will establish trust with the recipients. KIVA often states that loan recipients have an excellent record of repaying their loans – a few people who may default will not be a major factor.
    Do the math! A two year loan of $ 1,000 with 36% interest? I think you will agree that the total cost of such a loan to a struggling individual is immoral.

    • 158. k. m; Hayter  |  1 February 2012 at 14:08

      Visiting people once a month to collect is impractical as many of these entrepreneurs don not have access to safe keeping of monies

  • 159. Pat  |  9 February 2010 at 06:56

    Why not set up MFI’s in the community so that loan agents and the lenders don’t have to travel.

    I’m pulling out of Kiva because of the interest rates. When I started lending, I thought t I was loaning to people free of interest.

    Then I find out that the people have no knowledge of the Kiva lenders just a bank that is charging them 50% interest.

    I can see how loaning with Kiva can help the MFI because they get to charge 50% interest on money that isn’t theirs and that they have no obligation to pay back if the loan doesn’t work out, but I can’t see it really helping the small time entrepreneur.

  • 160. Neil Evansan  |  9 February 2010 at 06:20

    There will always be three (or more) sides to this two-sided coin. In the 1980s, when interest rates were as high as 18%+ for homes, agencies that were able to hold their costs at 10%-to-12% because of favorable agreements made during the rate run-up were also told those loans to “the poor” should be free because they are poor.

    The old saying states “there’s no such thing as a free lunch.” That is as true today as when first uttered, decades, centuries, perhaps even several millenia ago.

    As Meg writes, the goal of the microfinancier is self-sustainability. In that regard, sponsors are no longer the “deep pocket” from which to cover legitimate expenses. The people borrowing the money are the real supporters, because it is they who most benefit from their own growth.

    Poverty is not caused by money or interest, poverty is caused from a mindset of scarcity and hopelessness. To thrust that upon people who are making things happen in their own worlds does far more harm that resepecting the borrower in a solid loan transaction.

    To tell someone “here is free money for you” insults MANY people of our Worlds many Communities. We’ve made that insult too long and too often.

    The World goes’round because of 3 things – Love and Value and Respect. That organizations like Kiva and other operates from the first 2 speaks directly to the reason the 3rd is prevalent and abundant amongst their volunteers, employees and officers, as well as from the people they serve.

    ~ Neil ~

  • 161. Israrul Haque  |  8 February 2010 at 23:13

    Thanks for your report but there is no rationale to charge interest from poor people whom you are claiming to render financial services.Interest in itself is the cause of poverty and if it is charged from them we are pushing them to the debt trap as it is a vicious circle never to come to an end. All your micro loans should be interest free as they are coming from philanthropist in the form of donations and charities if they can bear the entire capital why can’t they bear a further small administrative cost, which will be sufficient to transact these loans. To add burden that too of the level of 36% is no service rather it is a great disservice which you are doing to the poor. We have to relieve the burden of the poor not to burden them with more cost .If you break the interest rate component it is comprising of four. 1.Cost of money 2. administrative cost 3. risk covering cost 4. inflation adjustment cost. Except administrative cost all other cost are source of exploitation which cannot be charged hence the leftover is just administrative cost which can also be borne by the donors as they are not asking for any returns in this world they will get the return in the hereafter. Hence to really serve the poorest of the poor community which your organization is really doing you have only to reorient by converting from interest based loans to interest free loans then it will be a real service to humanity.

  • 162. Israrul Haque  |  8 February 2010 at 23:06

    Thanks for your report but there is no rationale to charge interest from poor people whom you are claiming to render financial services.Interest in itself is the cause of poverty and if it is charged from them we are pushing them to the debt trap as it is a vicious circle never to come to an end. All your micro loans should be interest free as they are coming from philanthropist in the form of donations and charities if they can bear the entire capital why can’t they bear a further small administrative cost, which will be sufficient to transact these loans. To add burden that too of the level of 36% is no service rather it is a great disservice which you are doing to the poor. Wh have to relieve the burden of the poor not to burden them with more cost .If you break the interest rate component it is comprising of four. 1.Cost of money 2. administrative cost 3. rsik covering cost 4. inflation adjustment cost. Except administrative cost all other cost are source of exploitation which cannot be charged hence the leftover is just administrative cost which can also be borne by the donors as they are not asking for any returns in this world they will get the return in the hereafter. Hence to really serve the poorest of the poor community which your organization is really doing you have only to reorient by converting from interest based loans to interest free loans then it will be a real service to humanity.

    • 163. Olle Anderson  |  9 February 2010 at 02:57

      Thanks for the reports. I do agree in Mr Hauges comments. Although it must be understood that there are costs involved in the Kiva organisation it seem very wrong to charge the borrowers this much. Better to declare openly the need of money for executing the task and then put an additional 20 % to the lenders. Not a big deal for many of us philantropers.

    • 164. Andy  |  9 February 2010 at 05:39

      Yes, I agree with Israrul; charging interest is wrong and the admin costs are better covered by donations from supporters.

      Interest is needed in a growth-based economy but we know that growth-based economies are unsustainable on a finite planet. We must move away from this type of thinking.

      Requiring repayment encourages responsibility but charging interest is, in the final analysis, exploitative. I accept Meg’s explanation of the costs involved but I disagree that this is sufficient rationale to charge interest to the clients.

      Please look to cover your costs in another way.

    • 165. Toppie  |  9 February 2010 at 16:47

      I too feel that 36% interest on loans is indeed excessive. Personally I would be willing to pay more than the 71/2% donation to Kiva to help over ride the costs of doing business. I certainly don’t want Kiva to become another IMF!!

  • 166. Dakota Dalton  |  8 February 2010 at 09:08

    Meg,

    Thanks for the terrific synopsis of the travails of extending loans to folks in rural areas. It provided me a greater understanding of the labor, effort and dilgence required to visit clients in the field.
    Dakota

  • 167. Charlotte  |  1 February 2010 at 11:03

    Thanks a lot – this will make it a lot easier for me to explain to 18 new (potential) lenders coming to my place in two weeks why interest rates are so high! What they still will want to know is if a client can get into trouble if he/she can’t pay back the loan…

  • 168. Nancy  |  29 January 2010 at 15:17

    Thanks for this very informative report which lays out the ratiionale for the interest rates charged. Great to have the full story behind the numbers. Sustainability and access are key here.

  • 169. coambse  |  12 January 2010 at 01:08

    Meg,

    Thank you for the great post, I am not sure if something or someone prompted this but either way it is something you can’t understand until you experience it for your self.

    Ed

  • 170. Peter Frerichs  |  8 January 2010 at 08:06

    Agreed, Meg. It really needs to be spelled out from a “field” perspective to get a grasp of what these loan officers go through. I see too many publications argue the same point but in financial terms which makes the argument against “high” rates all the more easy.

    Cheers from Chile and keep up the good work. By the way, the organization I work for, http://www.bouldermicrofinance.org, provides training workshops for individuals working in microfinance at all levels. Our next workshop is in Costa Rica in March.

    Best,
    Peter

  • 171. Judy  |  7 January 2010 at 13:50

    Excellent report!

  • 172. Jan & John, KivaFriends  |  7 January 2010 at 13:19

    Thanks Meg. We need to be reminded at times that what seems unreasonable to us is just a fact of doing business when costs are so high. I give thanks for those willing to work to make microfinance sustainable for the future of the borrowers who will reap a benefit from it. jan


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