Note: This post was published in 2010 and contains outdated information. Please see this blog post or kiva.org/help.
By Leigh Madeira, KF10, Ecuador
The more I read the Kiva Fellows blog, the more I realize that there is a lot of controversy surrounding Kiva, its Field Partners, and microfinance in general. While I welcome the discussion, microfinance is a complicated concept and I have noticed that many times the criticisms are based on misconceptions of how Kiva and microfinance really work in the developing world. Below please find a list of the most common misconceptions surrounding the topic along with why, in my humble opinion, they are indeed myths.
Kiva`s Field Partners charge clients interest on the loans from Kiva, which they keep to pay themselves comfortable salaries and pad their fat Prada wallets.
Yes, the Field Partners do charge interest on the loans they receive from Kiva, but trust me, no one is getting rich here (according to my MFI`s 2008 public profile on Mix Market, the average employee makes just over $13,000 per year). Even with the interest, many Field Partners barely make a profit (e.g. according to Mix Market, the 2008 average return on assets (ROA) for MFIs was 2%).
Field Partners could, and should, solicit donations to cover operating costs instead of charging clients interest.
If only it were that easy! To this I want to make several points:
- There is not an unlimited supply of zero-interest funding for microfinance institutions around the world…to say that donations could suffice is quite an optimistic assumption! Think about your investment portfolio. Is a large portion of it invested in Kiva? Or is it more focused on assets that generate a return such as mutual funds, stocks, and bonds? I would love to meet the person who has half of their retirement portfolio invested in Kiva loans…but the reality is that investments are made to generate a return. Zero-interest financing is hard to come by, which is what makes Kiva so unique.
- Even if there were enough money in donations to cover a Field Partner´s costs, how do you know the money will keep coming? Charitable donations dropped double digits during the recent financial crisis. What would happen to your favorite Field Partner if their funding was suddenly cut 30% or worse? What would happen to the borrowers?
- Interest encourages borrowers to be disciplined for numerous reasons: (1) borrowers are more inclined to only take out the amount of money they actually need; (2) they pay back sooner to avoid paying more interest; (3) by charging interest, you weed out the clients who just want the money because it is available and free (also see Peter Marchant´s post)
- A main principle of microfinance is sustainability. Why do you make a loan on Kiva instead of making a donation through another source? The appeal of Kiva and microfinance in general is that you are helping someone be self-sufficient so that they are not reliant on handouts. Why would there be different standards for microfinance institutions?
- There is proof that microfinance institutions that make a profit instead of relying on charitable donations are able to reach more clients – profitable MFIs are able to add 25% more borrowers than their unprofitable counterparts
Fine, the Field Partners need to charge some interest, but the interest rates charged are WAY too high! It is usurious and does not help the poor.
- It is all relative…36% seems high to us, but in developing countries that is often much cheaper than any other option, if there even is one. I find it extremely presumptious and slightly offensive when someone who has never lived in a developing country and never worked in microfinance claims that there should be a 10% cap to interest rates charged to microfinance clients. Who are we to barge into an established, well-run microfinance institution to tell them how to do business, all based on our experience with a $500,000 mortgage with Bank of America in Santa Monica, CA? The world is a diverse place and what works in one country may not be feasible in another.
- No one is forcing these clients to take out loans with 36% interest. If they don´t want or are unable to pay the interest rate, they don´t have to get a loan! Poor does NOT equal stupid. Microfinance clients understand what they are agreeing to. If you think the borrower is business-savvy enough to merit your $25, what makes you think they don`t make the best choice when choosing financing?
- Many poor people ARE able to pay 36% interest or more. Here in the developing world the markets are extremely inefficient because of barriers to entry, one of which is access to capital. Once you knock down that barrier it is not uncommon for profits to double, triple, or more. Give these people some credit (no pun intended)!
- In addition to explicit costs, microfinance institutions also must cover the cost of inflation, which can be quite high and volatile in developing countries. Without at least growing with inflation, the Field Partner`s asset base will serve less and less clients.
- When you factor in the cost of funds (8.5-12% for my MFI as most funders are not as generous as Kiva) and inflation (8% in 2008 in Ecuador) you are likely already at a very high interest rate, which doesn´t even include operating costs and the default risk.
Microfinance institutions operate inefficiently…they don´t have to visit clients daily/weekly to collect repayments and could have offices closer to where their clients live so they don`t have to travel so far. With lower operating costs, they could charge lower interest rates!
Yes, many, if not all, microfinance institutions could operate more efficiently. Couldn`t every company? But let´s look at two criticisms I gleaned from Kiva blog commentators:
- Why do some Field Partners have to collect repayments daily/weekly? They could save money by doing it monthly — Yes, it is expensive to collect payments daily/weekly, but for some microfinance institutions it is their only option. If you collect monthly, the loan officers are carrying around much more money and, depending on the area, it may be extremely dangerous for the clients, the loan officers, and the banks. Also, repaying frequently in small amounts lowers the risk of the client defaulting. Although the administrative cost is high, the safety concerns and risk of default may outweigh the costs.
- The branch offices could be located closer to the clients to cut back on travel time — Well, they already are! The problem is that some areas are SO sparsely populated that it wouldn`t make sense to open another office there. Opening another branch in a town of 100 people because they have 10 borrowers there is the last thing a Field Partner should do to cut down on expenses. The only other option is to exclude the more rural entrepreneurs from becoming clients, which would unfairly ignore many deserving entrepreneurs.
Finance and philanthropy often clash, which makes it understandable that microfinance has so many controversial aspects to it. Regardless, I hope this blog has answered some lingering questions of the devoted Kiva reader and inspired a well-informed debate about Kiva and the role of microfinance.
Leigh Madeira is serving in Guayaquil, Ecuador with Kiva Field Partner Fundación D-MIRO as a member of the Kiva Fellows 10th class. Please join D-MIRO’s lending team, make a loan on Kiva or donate today!