I know I am entering a long running discussion regarding interest rates. Hopefully those of you that have strong feelings about microfinance interest rates will consider what I have to say and use this as a constructive forum to further discuss this contentious issue.
One of the more difficult concepts to understand in the Kiva process is that while lenders do not receive interest on their loans and often carry the risk of default, borrowers do pay interest on loans financed through Kiva capital. Most of the time these rates are the same as those paid by borrowers receiving loans financed by commercial capital and carrying default risk. The reasoning behind this has been thoroughly discussed on Kiva and there are official explanations on the Kiva website (http://www.kiva.org/help go to the Interest Rates section of FAQ) as well as numerous fellows blogs on the subject (http://fellowsblog.kiva.org/2010/01/07/bad-roads-interest-rates-and-mfi-sustainability/, http://fellowsblog.kiva.org/2010/11/02/debating-the-profit-motive-in-microfinance/, etc.). Therefore I prefer to focus on a fairly unique situation for a Kiva loan: a Kiva loan product that provides the borrower a lower interest rate because it has been financed by Kiva. Such a product is offered at several field partners, including Kyrgyzstan’s MCC Mol Bulak, the partner I am working with as a fellow. This is a great, tangible, effect that lenders should be made aware of. However, having observed this type of program in action it is also important for lenders to realize that implementing a Kiva product it is not as easy as it might sound.
Some of the issues that come up include flexibility of internal information management systems, microfinance institution (MFI) risk management, training of staff, borrower protection, and nepotism. I would like to add that this is not a list of problems I have come across at MCC Mol Bulak, merely a list of some potential problems.
- Flexibility of Information Management Systems: Every MFI has some type of internal information management system (MIS) and all are not created equal. Making a change such as adding a Kiva loan product is especially difficult for MFI’s whose MIS is created and managed by an external company. It can be a substantial cost in staff time and fees to add additional loan products. In some cases the original developer is an individual that is no longer available or a company that is out of business and therefore changing the MIS to add a Kiva product might require a complete redesign of an MFI’s systems.
- MFI Risk: Each of Kiva’s partner MFIs has a certain monthly fundraising limit. This limit is determined by Kiva’s Finance Team and usually varies throughout the life of the relationship between Kiva and the MFI. If an MFI wants to introduce a reduced rate product for Kiva financed loans, this requires almost real time tracking of loans disbursed at this rate, otherwise there might be a boom day for Kiva loans and a significant amount more then the monthly limit might be disbursed. At this time there is a one month limit for the time between actual disbursement and when a loan hits the Kiva website. Any additional loans that go beyond this 30 day limit or are beyond the monthly financing limit must be financed commercially, with the MFI realizing any loss due to the lower interest rate and unforeseen default risk.
- Staff training: Loan officers come from a wide range of educational backgrounds, some more extensive than others. Explaining an additional loan product, especially one that has explicit monthly limits can be difficult. Implementing a training program in countries with limited infrastructure while keeping down operational costs is another challenge. After initial trainings, successful products require updates and maintenance – such as if the monthly limit increases or decreases – and local champions to train new staff. This relates to the previous challenge of MFI risk as well. There are not many comparable products that are capped on a monthly basis. Finally, staff training also ties closely into the last two challenges, client protection and nepotism.
- Client Protection: Say MFI ABC has an extremely flexible MIS. Couldn’t they just cap the monthly limits within the system foregoing the need for complicated staff trainings and substantially limiting MFI risk? The biggest issue surrounding this is that products must be offered to clients in concrete, not conditional, terms. If I were to walk into an MFI’s office and the loan officer told me about a Kiva loan that had a great interest rate I might jump at the opportunity. If I opted to take the loan that day and then the same loan officer told me that there was a chance that this loan wouldn’t be available at the next meeting, it creates big problems. This situation might happen if the monthly limit was reached in the period between the initial meeting and when the loan is entered into the MIS. Reputation of an MFI as well as transparency to clients requires clearly defined loan terms, not loan terms that are offered one day but unavailable the next day. Another situation that can happen with a decreased interest rate Kiva product is that a client might not feel comfortable providing their picture and information for the Kiva website, but feel compelled to provide it because of the lower interest rate.
- Nepotism: In many remote regions where Kiva’s MFI partners operate, loan officers are a part of the small communities they are working in. As such, the inclusion of a loan product that offers a lower rate, whose target client is fairly ambiguous and is which is limited in its availability creates a potential for abuse. Do all the Kiva loans go to friends and family of loan officers? If someone has a personal issue with a lender will they not get a Kiva loan? These are all potential problems.
I am not presenting these challenges as an argument against Kiva loan products with reduced interest rates – I am all for them as I am sure many Kiva lenders are – but I hope this short list helps to inform lenders as it has informed this lender cum fellow.