Paying interest to lenders - pros and cons

[Guest]

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[The Mouser]

Well, I am not a tax accountant, but I do think that the tax issue will not be as large of a problem as I believe you have a window before you have to pay taxes on gains.  Since most of the loans are small, the amount of interest the average kiva user (a person with 3 loans) is not going to get enough interest to trigger a tax event.  Even someone in Finland who makes $2.25 a year in interest will probably not have to report it on any taxes (no offense intended to the Fin's).  If you are wealthy enough to have enough loans where the interest off those loans raises taxing concerns, you should be sophisticated enough to have your own tax advisor's to handle the problem.

We are really missing a couple of key pieces of information.  Like what is the average cost of funds for the various MFI's?  If the MFI's are getting essentially free money from KIVA but have to pay 7% from other sources then there is room for the interest question.  Obviously if KIVA is just one source of money out of many that charge 0% then we should just move on and disreguard the subject.  What is the cutoff where you have to pay taxes on income, for both US citizens and those abroad?

I am not saying that $32.50 or $50 is not a lot of money to them.  But they are pulling out a $650 to $1,000 loan, and that is not a large amount vs. the loan amount.  I think that 5% is way to high a rate to charge.  I don't think KIVA should strive to be a replacement investment vehicle in someones portfolio.  You are not putting money here because you are going to make a whole lot of money.  It is about creating a little extra wealth that can then be distributed to other worthwhile causes or loaned back out.  Sure, each person may only make 2 bucks a year,  but with over 100,000 people that can be a lot of difference that was not there before.  If a lender really has a problem with charging interest, give them the opportunity to opt out and reduce the cost of funds to the MFI for loans that they are lenders on.

KIVA can do just as much good by being the lowest interest rate lender as one with a 0 interest rate.  Its not about greed, and one or two percent is not that much more interest when your paying 40% even with a KIVA loan, and the normal rate there is 70% or more.  Although getting loans funded now is not a problem, interest rates could also be used to help get higher risk loans funded, like those in Gaza or some parts of Iraq, or loans made to a very new MFI.    It would be an incentive for the MFI to do good work as their cost of funds will go down as they gain reputation.

[joshman]

I see that there are many idealistic people on this chain that would frown upon anyone actually making back interest as a Kiva lender.  As if they were somehow taking advantage of the borrower.  I do not see this as the case.  If the MFI is making money on a profit basis, and they are being backed by Kiva lenders, who are not receiving any interest or incentive for tying up their money, this is a problem.  Monetarily, this is not a win-win situation.  At least a token amount should be trickling up to the lenders, for the simple purpose of keeping individual MFIs in touch with reality and accountable.

Don't get me wrong, I think Kiva is a great idea.  But there is a reason that the average Kiva lender gives 2.37 loans.  You get a good feeling by helping 2-3 people succeed, but returns diminish after this point for an average joe, who is trying to save money in support of his own micro-economy.  If Kiva paid rates similar to a savings account, you would see the number of loans per lender spike.  If Kiva paid rates similar to a CD, the ratio of loans per lender would increase even more.  It's simple economics.

  I love the idea of helping people to help themselves, but I'm not about to empty my savings or Cd's to do so.  Especially when I risk an a certain amount (per borrower), when the only reward is feeling good about helping them, while some MFI is making 30%, backed by my own money.

I have 9 loans with Kiva, I may lend a few more, but not much more than that.  I will thoroughly enjoy watching the progress of the businesses I have invested in, and will probably roll that money back in after they are repaid.  Perhaps lending on this scale(2-3 loans per lender) is the point.

I can tell you this much, if a Kiva loan paid the lenders a competitive interest rate, I would liquidate elsewhere, and fund hundreds of Kiva loans.  But his takes Kiva from being a nifty thing to do and show your friends, to an actual win-win situation.  Maybe the MFIs would have to collect less interest, but lets live in reality.

[Jill]

Hey Joshman,
       I found yours to be an especially thought-provoking post.  I thank you for your perspective and for the clarity with which you expressed it.  What you said, I know, has probably already been expressed here in a near infinite number of ways, but for some reason, when I read your post, it made me think in a way that I hadn

[Jill]

couldnt finish my last post.  Dont know if its a virus or my computer or if Joe is fooling around, tweaking, trying to improve, even more, this incredible Forum hes gifted us with, but it turns out that every time I try to insert an apostrophe and I-dont-know-what-else it freezes on me.  Pretty disconcerting.

      To try to finish the preceding, sans apostrophes:

       Josh, your post, most certainly, did not change my mind about whether I would want to accept any interest from Entrepreneurs to whom I had extended loans.  But it is possible that I may, now, be an infinitesimal bit more open-minded to the possibility of other Kiva Lenders receiving interest, should they desire to.....

     if that might encourage others to make substantially greater investments (could not put quotes in around investments, either),
in Kiva Entrepreneurs, and by doing so, help that many more people.
 
     Yow, I am done.  It is funny, being made to realize just how much I use apostrophes, quotation marks and whoknowswhatelse.
I hope that this is a passing thing.  Sorry.

[Dottie b]

Interesting points, Joshman. But my primary concern would be wheher the MFI is raising the rates it charges borrowers in order to pay us interest.

I think I would rather have the other bennies than interest - the photos, the updates on how the borrowers is doing, etc., that Ben pointed out as often difficult for the MFI to handle. In return for all that, their Kiva money is free. Seems fair to me.

Dottie B

[KivanSteven]

I think people generally dont want to taint that good natured "Im in for giving and only giving" type of attitude.  People also feel guilty in many ways and for many reasons if they are to profit off of the people they are helping.  But you also had me thinking about the subject in ways I hadnt before.  Money and economics is a part of everything, including charity, and including loaning through Kiva.  The question, assuming many many more people would lend in greater capacities if a rate of return was provided (if there were ever enough loans available at any one time), would be whether or not the increase in funding for many more entrepreneurs is worth the guilty feeling of a financial reward for a simple generosity that already rewards someone through the mere act itself.  

I think Kiva will eventually offer a rate of return but it will be incredibly miniscule...I wouldnt anticipate them being competitive with CD rates of 4-5%...unless it came from the MFIs interest profits...if they did offer rates that high I think it will be an out of control situation, so in that regard joshman, whether people want interest or not, I think you are correct that Kiva would be infiltrated with new lenders and more committed lenders in ways we cant even imagine...like some have said, Kiva would become a bank account...again the question is if the more evident mixture of personal finances with charity, and also gaining financially because of charity, is something people are comfortable with.

[joshman]

One thing to keep in mind, when I donate money to Kiva.org to help with their operating expenses, that is charity in the purest sense of the word, because I am giving money to a charitable organization to help them them with their operating expenses. 
Lending money via Kiva.org is an entirely different animal because you are not really giving your money away, you are letting someone else tie it up for a certain period of time.  In the first case, you can deduct the donation on your taxes (In the US).  In the second case,the money is in effect still yours so it cannot be considered a charitable donation.
I completely understand that there are many people who would not want to collect interest earned if it were paid.  It would be easy enough for Kiva to let you donate any interest earned to help them with their operating expenses-- this creates a 4-way win-win between borrower, MFI, lender, and Kiva.  Presto, the interest you are earning vs the interest you are donating would pretty much be a wash for the lender(for tax purposes), but would be an income stream for Kiva.

You could also collect the interest you earn, apply it to your Kiva account, and use it to lend even more money if you chose too.

the great thing with this approach is, a person in a lesser financial situation might choose to use an interest gain to help pay off a bill, while a wealthy Kiva lender could grow his portfolio in multiple ways; not only with regular cash infusions, but also with the interest earned on prior loans.  You could tailor your Kiva experience to your particular situation.   

With all this being said, I also agree with the many concerns on this thread about the MFIs behaving ethically and not exploiting the borrowers.  Kiva would need to have strict guidelines about how much interest can be charged, what percentage of this interest would need to be sent up the chain--along with an evaluation/monitoring of the collection process with an emphasis on dignity and human rights.

[Dottie b]

I suppose Kiva would have to mail 1099's to everyone who earned interest. Is there a minimum threshhold for this? If the average amount loaned per lender is $95, that's just a few dollars in interest. Of course, the amount lent may increase if the interest earned makes it worthwhile.

Dottie B

[miGIRLS]

Paying interest is going to create a whole different animal of an organization, but for now Kiva seems to have plenty of Kiva Loaners and not enough entrepreneurs. I would dread the compliance costs Kiva.org would encounter if it starts being an interest-bearing financial institution.

SUGGESTION: Put interest-bearing loans into a separate operation and give those lenders all the BRAC loans. 

[Dottie b]

Now that's a good idea, migirls!

I have another concern about interest-bearing loans. I would like to see Kiva do more to try to reach the poorest of the poor. That is very expensive for the MFI's and I think would be harder to do if they also had to pay interest to the lenders.

Between the group loans and the planned interest payments, Kiva is starting to look a lot like Microplace!

Dottie B