Paying interest to lenders - pros and cons

[Guest]

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[Ari]

Is there any transaction cost?  I thought PayPal was doing all of Kiva's transactions for free.  The interest paid to the MFI is its source of income, which I assume mostly covers the employees' salary.

[seenijg]

Hey Guys, very interesting discussion going on in this post. Though i like Ari's vision of bringing in more helpers or lenders(entrepreneurs, i don't like calling them that as it just makes this sound like a business which is totally not the case) i also respect and condone the psychological nature that Bob personified in his post as well as the core nature behind all of us that pulls us all to this wonderful community. I am a muslim and i will not receive interest in lending such money. Also, i will rather just lose my whole money being lent and know that at least i meant it for a good cause. I have been successful in my businesses and investments(though, never hitting 68%, i might add! ) and it was all thanks to capital funding for my first company many years ago. Though i cannot fund with that much capital, i believe in giving back and this whole Kiva structure makes it so possible with such a wonderful idea. I am sure you understand what i mean.

[Ramón]

Seenijg, generally, the borrowers are referred to as micro-entrepreneurs, not the lenders...

On the topic, although I can see why paying interest is something that may bring in more lenders, personally I wouldn't want to receive interest. If I did this because of commercial reasons, I wouldn't go to Kiva but to one of the many funds that invest in microfinance opportunities, or do things through prosper.com or other commercial microfinancing sites.

As for the cost structures, generally, the costs to originate a loan are somewhere in the 20-25 % range. These include the due diligence the MFI does, operational costs of the MFIs (paying salaries, office space, computers, electricity, etc.), sourcing costs for the money (interest paid to the fund that is used to make the microfinance loans), recovery costs (to ensure and process loan repayments) and the costs needed to cover for bad loans (3-4%). I'd say that in general, my non-professional estimate of what an MFI can save through Kiva is about 5-7%: they now can source their money interest-free, and don't need to cover for bad loan risks (this is carried by the lenders to Kiva-- us!).

As for not being able to receive interest as a Muslim lender, I hope that this won't stop you from investing in Kiva even though the MFIs charge interest on their loans. I understand that in Muslim countries there are alternative charging structures for loans; not through interest but by asking for a "loan charge" that would cover the costs that in the western world are generally covered through interest. I very much see many MFIs do the same things.

Another interesting point is, that not all MFIs are Not-For-Profits. Many of them are commercial MFIs, with a goal to create profits. Note that Kiva has no restrictions based on commercial/non-commercial status for MFIs in their partnership program. I can imagine that this could be a criterion for certain lenders to loan or not loan through a specific MFI...

[Bus]

I don't need/want a return on what I give to Kiva. I see this as something I put gradually more and more into every year and take the money out if I needed to. The feel-good part of of would diminish somwhat if there were an expectation of getting something out of it that I don't really need in the first place. The idea of giving to those in need and actually getting the money back is pretty amazing. I see this as attracting a whole new realm of people who have not given much to charity in the past for any one of a host of reasons.

The feel good part should not be underestimated as an adequate return for people drawn to Kiva.

Anyone have any idea how much Kiva's market of loaner's has grown since inception. I see investor growth potential from making more people aware of this as opposed to an expected return.

I plan on using it at my company for incentive gifts.

[Nick]

This is such an interesting topic, and its great to see so many people that do not want to receive interest!

I'm on the other side on this one for many reasons, only one of which is that I can't imagine a lender that would be interested in Kiva at 0% but not at a small return (I understand that religious practices create a subset that are ONLY interested in 0% roi, and I respect this practice).  MFIs are saving around 7-10% by accessing money at 0% from Kiva rather than from commercial sources, so I don't think that a small return to lenders would at all imply the necessity of charging extra interest to borrowers, but rather the MFI saving a little less by using Kiva.

One other point that is important to remember is that for profit MFIs that can get free money from either an aid organization or Kiva or whomever else have a HUGE advantage over an MFI that can only get funding at market rates.  There was recently a great article in the Economist about this...pretty much saying that MFIs that started under the umbrella of an aid organization but have since spun off into separate for-profit entities need to operate independently from aid funding as it disrupts the market.  We can all imagine a case where a not so efficient MFI gets free money and grows larger than it should and it is not providing as good of a service as it would if it were competing in more of an "open market" system.  This will be a huge challenge for Kiva as they continue to grow, because the MFIs they choose to partner with will have a huge advantage over MFIs in the region that do not have access to free money.  Due dilligence will only become more important as a bad partner can seriously disrupt the microfinance market in that region.

Sorry to ramble...I believe it is possible for Kiva to return a small percentage to lenders that comes NOT from additional interest charged to individual borrowers, but rather from the MFI itself.  It would be something similar to subsidized funding rather than free funding.

What if there was interest returned, but an option not to accept it and instead donate it to Kiva "overhead"??  It would be very similar to the donation option they have now...

Would this still turn some people away?

[Ari]

Thanks for your insightful post, Nick!  very interesting to read.

[dstrack95]

I am shocked this interest return is even being considered.  Does Kiva really think people want to benefit with added interest rates at the cost of the very people they want to help.  I understand how they may think it could draw in more $$$, but I see many people (myself included) stopping their donations.  After all, there are many other great charity organizations.

If people really want to make a return of their investment go buy a mutual fund.  Why would anyone see this as an investment idea.  Poor people paying your ROI?!?!?!  Its really almost comical.

[Sarah G]

I'm with those who don't want to receive interest from my Kiva loans.  I see it as a form of charity and fully intend to keep all the money I lend through Kiva in Kiva loans, and not take it back.

If Kiva does start providing a small amount of interest back to lenders, I'd love to see a  a "pay it forward" type of option, where I can choose that any interest I've earned goes directly to someone else's loan, maybe even someone from the same region of the world.   I support a charity that does this with livestock.  You "buy" a female goat/cow/chicken/etc for someone, and the first female offspring of the animal goes back to the charity to give to the next person.

[FANAFI]

I am shocked this interest return is even being considered.  Does Kiva really think people want to benefit with added interest rates at the cost of the very people they want to help.  I understand how they may think it could draw in more $$$, but I see many people (myself included) stopping their donations.  After all, there are many other great charity organizations.

If people really want to make a return of their investment go buy a mutual fund.  Why would anyone see this as an investment idea.  Poor people paying your ROI?!?!?!  Its really almost comical.

We don't want interest either and we are not happy with the thought of it either. We see Kiva as solely for the growth and self-sufficiency efforts of others so we don't have to keep pumping money into their government, who may or may not be trustworthy, and empowering the people on the ground who are wanting to make a difference from within their community for the greater good of their region. We don't view this as charity though as we do expect to get paid back with time. Charity can be accomplished through other sites, Kiva isn't a charity and shouldn't be called such. It's about people helping people, it's not people creating a social program to keep them down in the dust, but raising them up so they can realize their potential and apply it.

The debate rages on.

-Jeff

[optimistic.bob]

Nick,
Thanks for the post.
I still disagree with Kiva lenders charging or receiving interest and believe that the argument in favour is charged with western cultural biases that we all have. Somehow we measure efficiency by the profit motive when I believe Kiva should measure results through  the changed lives.
As to the point that MFI that receive Kiva funds or relief dollars are operating at an advantage over the for profit MFI's, I say Bravo! This arrangement allows them to be more entrepreneurial, adventurous and ultimately more responsive because they are attempting to achieve a social return on investment rather than an economic return.
With the existing capital and the new investors that are lined up, I hope that we can find dedicated MFI partners to provide vetting and distribution of 1000's of new loans. I hope that Kiva can remain fluid and resilient with the 'donations' that are requested as a percentage of each loan.The interest from NYT, PBS, TalkShoe is great but I suspect it will pale in comparison to the energy being created by the Kiva Family and our enthusiastic viral campaigns.