Loans that change lives.

February 23, 2006 4:28 PM

Kiva allows users to sponser small business enterprises in developing countries through flexible loans. By getting repaid and reinvesting, it's a really cool way to give a sustainable gift that keeps on giving.
posted by rollbiz (30 comments total)

sponsor
posted by milnak at 4:35 PM on February 23, 2006

It really is a cool idea. They don't listed any numbers of the businesses who have defaulted on the 'loans' however. I'd like to see that before donating, with reasons for the defaulting to make sure Kiva is doing appropriate things against people trying to scan the charity aspect of this.
posted by Kickstart70 at 4:53 PM on February 23, 2006

I heard about this on The World a few days back. They also talked about GlobalGiving. Pretty interesting stuff.
posted by bwilms at 4:56 PM on February 23, 2006

This is definitely a cool idea, but like kickstart70 said, it's hard to enforce how the money gets used and whether it gets paid back. Microcredit orgs have people on the ground to check on that kind of stuff, at least.
posted by TunnelArmr at 4:59 PM on February 23, 2006

Is anyone besides me wondering about the fact that they only list -one- business to invest in? I'm not questioning this, mind you, but it seems a bit odd.

I do like the concept....
posted by HuronBob at 5:12 PM on February 23, 2006

I guess I'm much less optimistic than the rest of you because my first thought was SCAM. I keep checking this thread for the mefi detective squad to uncover the shady side of it.
posted by [insert clever name here] at 5:26 PM on February 23, 2006

Regarding microfinancing in developing countries be sure to check out: Developing World Markets, TechnoServe and Unitus.
posted by ericb at 5:31 PM on February 23, 2006

Opportunity International is a similar org with a great purpose.
posted by allkindsoftime at 5:31 PM on February 23, 2006

Kiva is basically a slight alteration on a concept that has been well-tested by The Grameen Bank. The difference with Kiva is that you get your money back and have the option to reinvest, whereas the Grameen Bank automatically reinvests the money. It's sad that such a difference gets Kiva so much more attention, as it's entirely beneficial to donors, and not at all to borrowers.

I love the "what if I don't get it back?" reactions to a system that lets you lend $25 to someone who needs it. So what if you don't? It's only $25. Worst case scenario someone who needs it more than you ends up with it.
posted by scottreynen at 5:38 PM on February 23, 2006

These sound like some comparatively huge loans.

The average income in Uganda is about $300, those loans average about $500 and there's at least one $2,000 loan. I don't know if it makes sense or not, but I wouldn't really call them microloans if they're more than the average annual salary.
posted by loquax at 5:52 PM on February 23, 2006

[insert clever name here], I almost thought about a sort of disclaimer for that, given the things that have been going on recently with scammers on the blue. But what's more sketchy than the "this isn't a scam!!1!11!" claim...

To answer some questions (I've been following Kiva's progress for a few months before posting it here) Kiva does have people on the ground, all of the organizations they work with do follow up with the business owners. This, and the fact that they are careful about adding businesses, accounts for why there aren't too many lending opportunities at a given time. The supply of micro-loaners is currently much greater than the demand of business models they approve. No idea about the default rate though, it's an interesting question. Recently they've expanded to some more African locations, as well as Gaza and probably a place or two I'm forgetting. The FAQ's cover a lot of your questions as well. I'm not associated in any way, shape, or form with them other than that I gave a microloan as an Xmas present to myself.

loquax, the idea of the microloan is that it's a small amount of money to you, not them.
posted by rollbiz at 6:02 PM on February 23, 2006

The fact that I spend more money on Lattes at Starbucks each year than the average income in Uganda, puts things in perspective, for me anyway.
posted by onegreeneye at 6:28 PM on February 23, 2006

loquax, the idea of the microloan is that it's a small amount of money to you, not them.

Sure, but at the same time, those are some pretty disproportionately large loans for them. In a country where $300 is the average annual income, presumably, $500+ should not be required to start or finance a business, and I would think would make the plan susceptible to a scam, especially if the money does not *have* to be paid. Most other microfinancing plans I've heard of involve sums like $50, or $100, or more to a mature business, not an individual. I'm not saying this is a scam, just that I don't understand the economics of it. It may very well make perfect sense in a local economic context.
posted by loquax at 6:38 PM on February 23, 2006

Wouldn't it be preferable (for all parties) for a contributor to make a donation and get a guaranteed tax break rather than make a loan that earns no interest and may not be paid back at all?
posted by brain_drain at 6:47 PM on February 23, 2006

loquax, here's a quick economics lesson for you: the typical business requires at least one employee, so the cost of the business is at least the income of one person.

brain_drain, loans encourage investment and donations encourage spending. Investment is better for development.
posted by scottreynen at 7:07 PM on February 23, 2006

loquax, here's a quick economics lesson for you: the typical business requires at least one employee, so the cost of the business is at least the income of one person.

Thanks for the lesson. I don't think you read about the businesses being invested in. People are buying livestock, maize and millet and general goods to resell for profit. Not hiring employees.
posted by loquax at 7:24 PM on February 23, 2006

Good post, rollbiz - I have been keeping my eye on this site too. I love the concept of microcredit - here's a post with more info on Grameen and links to other initiatives.
posted by madamjujujive at 7:48 PM on February 23, 2006

- nice first post, btw.
posted by madamjujujive at 7:50 PM on February 23, 2006

I think this is a great concept, but they should provide default numbers. I went to Kenya last year and something as simple as a well could have made a difference for so many people. At the same time, I saw several Maasai with cell phones and digital watches (something of a status symbol).

loquax, undeveloped countries often have much lower per capita GDPs because people are providing many services for themselves that are counted in GDP and that we pay for. We pay for food preparation, cleaning, transportation, etc. while a Ugandan must provide all of those services for himself or herself. While a loan above the per capita GDP may seem extreme, it is hard to imagine anyone in the U.S. starting a business for under $50,000 (more than the U.S. per capita GDP)
posted by Frank Grimes at 7:59 PM on February 23, 2006

Frank Grimes: Very true, but consider how (comparatively) difficult it is to get said loan for $50,000 in the US to start a business. You need a firm plan, collateral, good credit, guarantors, etc. Lenders lend that money because they believe they will get it back, with interest, and have remedies in case your business fails. The fact that the same isn't true of these loans gives me pause when considering their relative size, no matter how much I like the idea.
posted by loquax at 8:15 PM on February 23, 2006

I don't think you read about the businesses being invested in. People are buying livestock, maize and millet and general goods to resell for profit. Not hiring employees.

Those "people are buying livestock, maize and millet and general goods to resell for profit," those are employees. We pay people to do those things because they need to stay alive while they run the business, and that cost is part of the expense of the business.

consider how (comparatively) difficult it is to get said loan for $50,000 in the US to start a business

$50K/$300 = 167. Some who makes 167 times our average income of $50K (that's $8.3M) can easily afford to loan someone $50K to start a business. In fact, that's exactly what banks do when they give business loans in America.

The difference is that Western loans involve collateral whereas Kiva's loans don't. Collateral provides the borrower with an incentive not to fail, and the lender with some security. So which of those are you worried about: that someone living in an impoverished developing country needs more incentive not to fail, or that someone in the wealthy West needs more security on a $25 loan?
posted by scottreynen at 8:43 PM on February 23, 2006 [1 favorite]

loquax, I think what maybe you're not taking into account is the context of who this service is really aimed towards on the lender end. What I, as someone who likes to throw a few bucks towards charity, like about this concept is that it can be a sustainable and renewable donation. If I give 25 bucks to a charity, it's gone and I can only hope it did some good. With microcredit, at worst the loan defaults and someone who needs the money more than me winds up with it. At best, the loan is repayed, someone is better off for it, and I can either take my money back or re-loan it indefinitely to new people needing a helping hand. It's not the same as a venture capitol investment here. It's a sum of money that can continually help different people in different places again and again. I don't care if I make interest or it defaults any more than I would care if I gave the money to Sally Struthers and Co. And with Kiva, at least I can be fairly confident that the overhead is little to none.

(By the way, thanks to those who appreciated the post. It's tough to know what will fly on the blue.)
posted by rollbiz at 8:48 PM on February 23, 2006 [1 favorite]

madamjujujive, I'm looking at you. Great previous post that I never saw.
posted by rollbiz at 8:52 PM on February 23, 2006

Look, my point is not that this is a bad idea, or that this program is a scam, but if raising that kind of capital in Uganda is impossible (which it essentially is) and this program is providing (essentially) interest-free, unsecured loans/donations that are equal to or greater than the average annual income, it leaves the program very susceptible to manipulation. Most programs that I've come across avoid this by keeping the amounts lent smaller, and earmarked for capital investment rather than inventory expansion.

This has nothing to do with "how little it means to westerners" or donations. If the goal is to expand business and sustainability rather than give handouts (practical in their own right) or lining the pockets of scam artists, then I'm not sure this program is going about it the right way.
posted by loquax at 9:03 PM on February 23, 2006

Look, my point is not that this is a bad idea, or that this program is a scam, but if raising that kind of capital in Uganda is impossible (which it essentially is) and this program is providing (essentially) interest-free, unsecured loans/donations that are equal to or greater than the average annual income, it leaves the program very susceptible to manipulation.

Well, that's what you think, anyway. Personally, I would imagine that fewer, larger loans would be easier to keep track of.

But the idea that you, upon pondering the idea for a few minutes, are able to see more clearly the problems in the idea then people who have been working on the very thing for months seems, unlikely to be correct.
posted by delmoi at 10:09 PM on February 23, 2006

Another reason larger values might be used is that for a $25 loan, the amount of money isn't even worth tracking. The reason for loaning it, rather then giving it, is that there has to be some motivation for the person to use it well. But to actually keep track of it and return it too its owner would cost more then $25 in paper work, and far more then any interest earned.

With a $500 loan, the tracking becomes worthwhile.
posted by delmoi at 10:11 PM on February 23, 2006

I really don't know why you have to be so obnoxious about it. Of course it's my opinion. Of course I haven't thought about their model as much as they have. Should I just shut up and say huzzah for any program that transfers money in any way from the West to Africa?

While the microfinance industry typically achieves high repayment rates, cases of loan default certainly exist. Kiva works with its partners to do everything in its ability to recover losses resulting from a failed business. However, we cannot guarantee every loan will be successfully returned, and thus we cannot guarantee that you will definitely receive 100% of your money back.

The microfinance industry as a whole claims as high as a 97% payback rate. While the performance of Kiva's portfolio may vary since we are initially dealing with a rather small pool of businesses, we are proud to report that so far 100% of businesses have either repaid their loans in full or are well on their way to doing so.

Kiva has yet to begin its metrics and tracking system officially, but by January 2006 plans to implement it. For the time being, we are putting all of our energies into proving the "sponsor a business" concept and getting new lenders involved.

These statements concern me. Assume they track the investments in a meaningful way (say, once the program expands beyond the initial couple of dozen). What good does tracking do if there are no consequences to defaulting? Regardless, as they say, they have not yet begun their "tracking and metrics system". Other programs create incentives for repayment, such as starting with small loans as a means for qualifying for larger loans, or banning loans to a group of people if one defaults. Kiva does not mention this, and lends money to one of the poorest countries in the world at a starting amount 3-10 times higher than other organizations operating in Latin America. Even in the US, microcredit organization loans average about $500-$1000.

Their statements about the microfinance industry as a whole are also dubious. There are serious problems with microfinance, unless it is implemented properly, and the problems are mostly a lack of understand of local economics and local motivations. Like the massive infrastructure projects in the third world that shock us due to the scale of their failure, so too can other projects, even if they sound great. The quoted repayment rate of 97% is a fictitious number that has been floating around since the mid-ninties. Many microcredit programs have created classes of repeat lenders, dependant on that credit rather than the theoretical sustainable business. Others have created "entrepreneurs" who essentially act as middlemen and loan officers. All of the talk of giving control over money to "the responsible women of the village" is a well-meaning fantasy. You can look these issues up yourself. Microcredit and microfinance is nothing new, and is plagued by a great deal of well-meaning naivety when it comes to good stories and ideas that "make sense" to us here without having any understanding of local economics. These people claim to have that knowledge and understanding, and I wish them nothing but the best. But lending yearly salaries without consequences for default seems like a recipe for disaster.

Again, as much as I respect the motives and goals, the fact that an organization such as Kiva is embarking upon such a task doesn't mean they know what they're doing, or that their model will be met by any kind of success. My concern is that money that goes into programs that are flawed don't go into programs that can actually make a difference. Access to credit and financial services are vital, but it doesn't mean that we can't turn a critical eye to the industry (and yes, these days, for the most part, it is an industry, not a grassroots charitable endeavor).

Here are some links. And some more. And some problems with microfinance.
posted by loquax at 11:18 PM on February 23, 2006

I worked at TiVo with Matt Flannery, one of the founders of Kiva, and he's a smart, talented, hard-working guy. I wouldn't bet against his success in whatever he decides to do. In the short time they've been around, Kiva has already made the world a little better, and I expect them to go on to do great things.

And loquax, I don't think Kiva, at least, qualifies as an industry, and it does qualify as grassroots. There were three people who wanted to make the world a better place and I know Matt at least quit his tech job to do it. And a bunch more folks thought it was a good enough idea to join them or at least help out. I doubt they think they're solving all the world's ills, but I think they're much more likely to help than hurt.

The other thing that I think you miss is that the penalty for defaulting is shame. That doesn't mean much if the borrower is shameless, but at the scale they've started out on, and with the social connections they have, they can have a pretty good idea of the character of the borrower.

If you have constructive suggestions for them, drop Matt a note in their contact form. I expect that he will use your feedback and the measured success or failure of parts of their program to improve its future performance.
posted by surlycat at 1:47 AM on February 24, 2006

I have sent an email to Kiva contact, directing them to this thread and seeing if they would like to comment on it. If I get something back, I will post it here. I can understand your concerns, loquax, and I'd like to give them a chance to address them if they so choose. I became interested in the microloan concept after reading this book, which I highly recommend to anyone with an interest in West Africa and/or the failings of charity without end.

Thanks for the insightful comments on both sides, people.
posted by rollbiz at 5:33 AM on February 24, 2006

rollbiz: I would love to be completely wrong in my thoughts about Kiva. It does seem like a very positive plan, and I'm sure that the people in charge are intelligent and committed. It would be interesting to hear what they have to say.

Surlycat: Kiva certainly is a grassroots charity, especially compared to some of the other organizations that exist in that field, and some of their partners. I was talking about both Kiva and the industry as a whole in my last, hastily edited comment. Perhaps I was a little harsh in my last comment. I think their model (given the sums of money being lent) could work if, as you say, their local connections allow them to personally know each borrower, and to personally stay on top of the loans. This would replace the need for credit and collateral in the West, and the various consequences for defaulting in other microfinance plans. Unless Kiva's organization grows, I suppose that would mean that the number of active borrowers would have to stay low.
posted by loquax at 6:16 AM on February 24, 2006