Apr 15, 2010
By Premal Shah
New York Times Article on Microfinance Interest Rates and Profits

Hi Kiva Community,

We're writing in response to the recent New York Times article, "Big Banks Draw Profits From Microloans to Poor" by Neil MacFarquhar. If you haven't read it, you can find it here: http://www.nytimes.com/2010/04/14/world/14microfinance.html

The article brings up valid concerns regarding microfinance institutions (MFIs) and the dangers of commercialization. We share these concerns, especially as a non-profit dedicated to helping alleviate poverty. That said, we noticed that the article may leave readers with an impression about Kiva's role that is not entirely accurate. As such, we understand that you may have questions, so we wanted to clarify any confusion around how Kiva works.

Q. When I lend money on Kiva, does the borrower pay interest?

Yes. Kiva's local Field Partners (MFIs) charge interest rates and fees to the borrower in order to cover the cost of their operations.

Q. Does Kiva make money off of this interest that borrowers pay?

No. We pass 100% of the money you lend on Kiva to the local Field Partner who administers your loan to borrowers -- we do not charge interest and we do not take a cut.

Kiva pays for its operations by relying on Kiva Lenders like you to 'tip' us each time you make a loan. This is similar to an optional tip you might give to the waiter in a restaurant. Last year, your tips covered approximately 70% of the cost to run Kiva, a 501c3 non-profit. The remaining 30% came from foundations and other sources.

Q. So are Kiva Field Partners making profits on loans?

It is important to understand that, like Kiva, approximately 80% of our Field Partners are not for profit organizations. The other 20% are for-profit institutions with a strong social mission.

Despite the higher interest rates that our Field Partners charge overseas, as a whole they are barely breaking even. For Kiva's entire portfolio, our latest data shows that the Return On Assets (ROA) across all of our Partners is approximately 0%.

This confirms our understanding that most of the interest and fees charged to borrowers are going to support the cost of supporting the lending itself.

Q. How much do Kiva Field Partners charge their borrowers?

It depends on where in the world you live.

In 2007, our Field Partners in the U.S. charged interest and fees to generate an approximate 10% yield on their loan portfolios. When you include our overseas Field Partners in the mix, that average jumps to 36%. Basically, it's more expensive to offer loans in the Developing World than in the West.

Q. Why are some of your Field Partners charging so much?

We originally founded Kiva to enable microloans in some of the poorest and most remote parts of the Developing World. We were quickly surprised to learn that it cost more to loan money in the Developing World than we were used to in the West. This is due to two main reasons:
  • Many of the things we take for granted: the lack of infrastructure, transportation, and logistical infrastructure in the developing world makes everything more expensive. (One of our Kiva Fellows in Nicaragua highlighted some issues here, which a Kiva Fellow in Mexico expanded on as well.)

  • In addition, loan sizes in the developing world can be much smaller than in the first world. The average outstanding loan size for our US borrowers on Kiva was $5,572. When you include our overseas field partners, that average loan size drops down to $395. As a result, the costs of administering smaller loans in the developing world is going to be a larger percentage of the loan - since it costs roughly the same amount of money to administer a loan regardless of its size.

Other factors like population density in the countryside and local inflation rates can also greatly increase costs of offering loans in the Developing World.

Q. Why don't you limit your Field Partners interest rates to say, 15%?

If we limited interest rates, that means that many of our Field Partners would no longer be able to afford to lend to many of the poorest regions of the world.

At the same time, we definitely don't want interest rates to get uncomfortably high.

Q. So what do you do when interest rates get uncomfortably high?

When that happens, we take a good hard look at the Field Partner's rate of Return On Assets: how much money is the MFI making off of its loans, after expenses? And if the return is high, then is the MFI investing those returns back into the borrowing community?

If so, we're open to working with them. But if the money is not primarily going to promote the social mission of the MFI, then we will strongly reconsider the relationship.

Q. How does Kiva make sure that my money is going to a Field Partner that treats borrowers fairly?

When Kiva evaluates potential Field Partners, we carefully review their social mission: their interest rates, operating costs, loan sizes, populations served and other client based services ("micro-finance plus" services). We perform extensive reference checks and due diligence, making sure to look at how well Field Partners match our core values: Poverty Focus, Empowerment of Women, Commitment to Social Performance Management and whether there is a Client-Centric Culture.

We've also started requesting that our Field Partners endorse the Consumer Protection Principles published by the Smart Campaign:

  1. Prevent over-indebtedness. A financial institution measures up to this principle by carefully establishing the borrower’s ability to afford the loan and repay it. Clients should be able to handle debt service payments without sacrificing their basic quality of life.
  1. Transparent Pricing. A financial institution measures up to this principle by ensuring that complete information is made available to customers in clear language that is not misleading and that the customer is able to understand.
  1. Appropriate Collections Practices. A financial institution measures up to this principle by maintaining high standards of ethical behavior even when clients fail to meet their contractual commitments.
  1. Ethical Staff Behavior. A financial institution measures up to this principle by creating a corporate culture that values high ethical standards among staff and ensuring safeguards are in place to prevent, detect and correct corruption or mistreatment of clients.
  1. Mechanisms for Complaints Handling and Resolution. A financial institution measures up to this principle by having a mechanism for collecting, responding in a timely manner, and resolving problems for their clients.
  1. Privacy of client data. A financial institution measures up to this principle by respecting the privacy of client data, ensuring the integrity and security of client information, and seeking the client’s permission to share information with outside parties prior to doing so.
So far, about 25% of Kiva Field Partners have officially endorsed the Consumer Protection Principles. We've been asking Field Partners to, by the end of the year, either endorse such principles or to explain why they're not making such an endorsement. Kiva will review the reasons for why a Field Partner may not endorse the Consumer Protection Principles in determining whether the Field Partner remains with Kiva. More information on this can be viewed here: http://www.kiva.org/blog/2009/04/03/protecting-microfinance-clients.html.

Finally, Kiva has embarked on a project to determine a baseline for social performance indicators for all of its Field Partners using an industry standard known as the CERISE tool (www.
cerise-microfinance.org). This will provide a standard measurement for social performance for all of its Field Partners by the end of 2010. More information on this can be viewed here: http://www.kiva.org/blog/2010/03/03/2010-social-performance-baseline-for.html.

Kiva has roughly 50 Kiva Fellows volunteering in the field at any one time, visiting and working with our Field Partners. These Fellows will be serving a key role in helping Kiva implement its CERISE program to measure social performance by its field partners. The 200 Kiva Fellows who have rotated through our program also provide a vital on site presence for Kiva in the field. (For more information, you can follow their blogs at http://fellowsblog.kiva.org.)

Q. Kiva's Field Partner LAPO Nigeria was criticized in the New York Times -- what's going on?

LAPO ("Lift Above Poverty Organization") has been the subject of controversy due to its high effective interest rates and profitability. Indeed, out of 112 active Kiva Partners, LAPO's Portfolio Yield is one of the highest at 83% (vs. 36% average for all other Field Partners). Our measure of Field Partner profitability - Return On Assets - shows that LAPO is again higher than average at 15% (vs. 0.64% average for all other Field Partners).

Q. So why does Kiva still work with LAPO Nigeria?

LAPO is a non-profit (not a bank) with a clearly stated social mission to serve Nigeria’s deeply underserved and under-banked population. Net income made by LAPO are used to expand its portfolio to serve more of Nigeria's poor and unbanked.

We've reviewed their strategy of using profits to avoid having to leverage their capital (beyond a debt to equity ratio of 3.6), and came to agree that leveraging their capital would have prevented them from borrowing money and would have hampered their growth considerably. Unfortunately as an NGO, LAPO has no way to reinforce its equity base outside of retained earnings.

Considering LAPO's social mission of serving Nigeria's poor and unbanked, we've grown comfortable over time with their approach.

One update we're watching closely: they are currently in the process of getting approval to legally offer microsavings to their borrowers, which will require them to convert to become a microfinance bank. Like all of our MFI partners, we will continue to review the performance to ensure they remain consistent with Kiva's social mission.

Q. Is there anything else we should know about LAPO?

These guys are pretty innovative. We've been impressed by a special internet-only "Kiva Loan" product that LAPO created that offers superior terms and broader availability for Nigerian borrowers.

These Kiva Loans allow LAPO borrowers to take an individual loan with much more generous terms than they would normally qualify for. Kiva Loans have a grace period of a month, as opposed to the normal 2 week grace period. Also, Kiva Loans offered by LAPO allow borrowers to pay back their loans monthly, versus the usually requirement of weekly repayments.

Most of all, LAPO has been able to use these new Kiva Loans as a way to reach individual borrowers. Historically first-time borrowers have had to participate in several "group loans" before even being eligible for their own loans. Now first-time borrowers can qualify for Kiva Loans. This has opened up borrowing opportunities to a whole new generation of borrowers.

Q. How come Kiva's data on LAPO Nigeria was out of date? Can I trust Kiva to get the numbers right?

To make sure we have the most accurate data, we use audited sources for data on Kiva's Field Partners.

The auditing process introduces a time lag in the data: first the MFIs have to get their data audited by their accountants, and then in many cases that data has to be standardized by MIX (the industry source for financial data on MFIs). As a result, Kiva was still receiving audited 2008 financials for its MFIs as recently as late 2009. That's not the only delay: while a majority of our field partners use MIX, we've had to manually calculate the portfolio yields for the remaining portion of our Partners.

As a result of all these time lags in the process, the site is still currently showing 2007 information for most of our Portfolio Yield data. We should finish updating our 2008 portfolio yield data for all 112 field partners soon, which would have resolved the data discrepancy noted in the article for one of our Partners.

Moving forward, we are increasingly standardizing on using MIX's data for Portfolio Yields. This should improve the speed of our updates - and as MIX continues to become the industry standard for third party microfinance data, we should be able to update our portfolio yield numbers more quickly with every passing year.

Q. When I lend money on Kiva, does my money go to the individual or to the organization?

We get this question often, and to address it, Matt Flannery, Kiva's Co-Founder and CEO, wrote in November of last year that "People on Kiva.org truly do receive the loans that are shown on the website...It's safe to assume, for instance, that if a farmer on Kiva.org applies for a $500 loan, that he actually does receive that loan."

Matt
further clarified in December that, "Kiva works with Field Partners on the ground that are under legal contract to ensure that each Kiva borrower listed receives their loan funded on the Kiva website. Kiva conducts audits to ensure that our Field Partners are doing this. To suggest that this is not taking place is to suggest that Kiva's Field Partners are in violation of their contract with Kiva."

To get specific: if you lend money to Tarek in Lebanon to purchase seeds for his farm, those funds are going directly to cover the pre-disbursed loan to Tarek. In addition, each loan you make is 100% tied to his repayment. If Tarek makes his monthly loan payment towards your loan, you get that specific money back. If he doesn't make his monthly payment, you lose that money. This establishes a true financial link between you and the entrepreneur you've chosen.

To learn more about how loan funds get to Kiva Entrepreneurs and back to you, click here.

Q. I only want to lend through Field Partners that are not making a profit - how can I do that?

We've heard this a few times recently, so we'd like to gauge your interest in adding this feature. If you'd like to see this on the site, please contact us at the email below!

In the meantime, you can always check out third-party sites like http://www.kivabank.org/ -- which allow you to filter all fundraising loans posted on Kiva by the profitability level (i.e. ROA) of the Kiva Field Partner.

Q. I have more questions or comments - what should I do?

We'd love to hear from you, please email us at contactus@kiva.org.

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New Update as of May 5th 2010

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LAPO and Kiva

Kiva is suspending fundraising for loans from the Nigerian microfinance institution LAPO and refunding LAPO loans on the site that have yet to be fully funded.

LAPO has been the subject of recent controversy surrounding its high return on assets and high interest rates. Kiva began a preliminary investigation to answer many of the questions raised about LAPO’s social mission and has begun to receive important information from the institution. Until we're able to confirm a clear plan and demonstrable progress on key metrics regarding LAPO's social mission, we've chosen to take the prudential step of pausing the institution from further fundraising on Kiva.

What does this mean for existing Kiva lenders?

  • Currently fundraising loans that have not yet been fully funded will be refunded to lenders.
  • Existing loans that have been fully funded will be paid back by Kiva lenders as each LAPO borrower makes their regular payments.
  • In addition, new loans from LAPO will not be added to Kiva.


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Premal Shah leads Kiva.org, a website that allows you to lend $25 to the working poor. Since 2005, Kiva lenders have financed over 1 million low-income entrepreneurs from 75 countries, with a 98% repayment rate. The site has been named as one of Oprah's Favorite Things and a Top 50 Website by TIME Magazine. Premal’s inspiration for Kiva came in 2004. Working for several years at PayPal, he took 2 months off to volunteer in India. There he worked with low-income women to help them sell handcrafts online. While the project had mixed results, it strengthened his belief that the right combination of technology, business and love can dramatically accelerate opportunity for those most left out. Today with a burgeoning community of 1 million Kiva lenders, this belief becomes more of a reality each day. For his work as a social entrepreneur, Premal was named on FORTUNE magazine’s “Top 40 under 40″ list. Premal is a graduate of Stanford University.

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