Paying interest to lenders - pros and cons

[Guest]

.

[Odette]

Canadian income tax forms are compicated enough, especially when it comes to capital gains. Firstly, we are taxed on interest and then there is the foreign 'investment' to consider......it's really not worth it from my perspective. 

If my primary concern is to make money, then Kiva would not be where I would be putting my money (not in a savings account in a bank either.)

The cost to Kiva to determine interest with 180,000+ lenders, at the present time, would be extremely high and a logistical nightmare.  I would question whether or not the MFI's would add that to the borrower's interest, which in some cases is an already whopping 35%.

[Dottie b]

Canadian income tax forms are compicated enough, especially when it comes to capital gains. Firstly, we are taxed on interest and then there is the foreign 'investment' to consider......it's really not worth it from my perspective. 

In the U.S., it would be taxed as interest, which is a higher rate than that on capital gains.

Dottie B

[joshman]

I definately understand that the number of lenders exceeds the number of borrowers at this point in time, and have some idea the of additional complexity added by paying interest and tax laws.  If the ratio of lenders to borrowers, along with the ratio of loans per lender, remain constant, there really isn't a problem.  It looks as though these loans are getting funded very fast at the present time.  The question is, will the influx of new lenders providing 2.3 loans continue to exceed demand?  Is the current rate of new lenders a function of hype, due to recent press coverage, etc?  I would venture to guess that the MFI would seek out funding (which they would most likely pay interest on) from parties other than Kiva lenders, if they need to.

[jcherry_99]

I am replying to the thread "Should lenders receive payment?"

I did not join this as an avenue to make money.  As a matter of fact, I would be in favor of receiving less back if it lowered the interest rate.  The amount the borrowers have to pay back is just outrageous and would be classified as usury (or credit card interest) in my country (Canada).

This bank allows people with as little as 25 dollars the opportunity of making a difference in the world.  If interest were paid, large lenders would soon have their nose in here, to the detriment of all, particularly the very people we seek to help.

If people want interest, let them invest in more traditional avenues.

Leave this to helping those who have a track record for being good risks.  We have only put in 300 dollars. It would not kill us if nothing was repair (but it would discourage us from putting in more).

[Joannah]

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.

I hope this won't sound condescending, but there's no need to be shocked by the suggestion of returning interest on kiva loans. The vision behind kiva (and I don't want to hijack Matt and Jessica's project), was to revolutionise charity. To move away from charity towards a more market based and sustainable approach.

I understand that people view this as a social investment or a donation of some kind, but it would seem illogical to STOP lending if interest rates were used, as long as the interest rates were still reasonable (or the ROI borne by the MFI as someone suggested) then the end result would be the same, helping small entrepreneurs in need. Would people really deprive the entrepreneurs they claim to care so much for just because they the lender wouldn't feel as good (or warm and fuzzy, as someone put it). This is not about us!

At the moment though, the debate is really quite academic. the number of lenders and the speed at which loans are funded is incredible, and doesn't look like drying up anytime soon. However, we do have to look to the future. The rate at which new partners are being signed on is also rapid, so we may have to look at atttracting diverse souces of investment. At this stage I think kiva is prabably just looking at all the options, and will take into account the feelings of its lenders.

There have been some great suggestions, such as waiving your interest or donating it to kiva's overheads. Hopefully kiva can come up with a model that will please everyone. This is still an experiment, and I think it would be interesting to see how far down the 'financially sustainable road' kiva could go. This will never be HSBC, but the financial world is changing, with a lot of institutions now introducing 'Ethical Investment' portfolios and other environmental and social standards (at least they are in Oz, I don't know about the US).

Interestingly, while kiva is looking into the ROI option, tit is also looking to introduce 'social performance' data to measure the social impact of loans. So maybe we can swing both ways!

Sorry this has turned into an essay, I'll get down off my soap box now!

Happy lending!

[AccountAbility]

I hope this won't sound condescending, but there's no need to be shocked by the suggestion of returning interest on kiva loans. The vision behind kiva (and I don't want to hijack Matt and Jessica's project), was to revolutionise charity. To move away from charity towards a more market based and sustainable approach.

I understand that people view this as a social investment or a donation of some kind, but it would seem illogical to STOP lending if interest rates were used, as long as the interest rates were still reasonable (or the ROI borne by the MFI as someone suggested) then the end result would be the same, helping small entrepreneurs in need. Would people really deprive the entrepreneurs they claim to care so much for just because they the lender wouldn't feel as good (or warm and fuzzy, as someone put it). This is not about us!....

Happy lending!

Since this discussion will probably continue as new Friends enter into it, I guess it is appropriate to summarize the argument against paying interest (at least from my perspective). Concept number one: Money doesn't grow on trees.  Where will the interest payments come from?  It can only come from Kiva itself, the Field Partner or the borrower. Kiva as a non-profit is seeking not only donations from lenders but also grants from larger organizations to fund its operations.  Will they seek additional donations to fund lender interest?  Many/most of the Field Partners (MFIs) are themselves non-profits, seeking to gain sustainability.  Some are subsidized by "parent" organizations for their operating costs in order to keep borrower interest down.  Do we want to squeeze these organizations in order to extract lender interest from their operating budgets?  The borrowers are already paying interest, (exorbitant interest by western standards and intolerably high by many on this forum).  Do we ask the borrower to pay more interest so Kiva lenders can have some?  Unless money starts growing on trees, Lender interest has to come from one of these three sources.

The only area worth exploring here is that some MFIs are already self sustaining while others are far from it.  If the mature MFIs are up for sharing some of the interest to level out their funding source costs, then I think Kiva should keep that interest payment in a fund for low cost loans or grants to struggling MFI partners it is working with so that they too can become sustainable.

Dan

[StevePPS]

Perhaps this could be simplified for all if lenders were able opt out of interest, just like you can disable email notifications.  I am guessing that many lenders like myself would elect to be part of the "interest free" population while Kiva could design a program to attract funds from interest bearing sources.

[charity]

I would hope that Kiva never sets up a program that extracts additional interest payments from the borrowers or MFIs.    The one area that I think could produce interest is the way that Kiva currently holds our repayment money until the loan has been fully repaid.  I would say that for now -  as long as Kiva is still growing and using that interest to expand their MFI/country reach, expand their server space, increase the number of fellows to go check on MFIs and provide good journals, providing better communication/feedback to lenders, etc etc, there should also be no push to get interest from Kiva either. 
But on the possibility that the number of lenders eventually evens out, growth become stable and predictable, and Kiva is able to provide exceptional service and still have some money left over - that is where I can see that they can either give us the option of getting our repayments back as they come back, or pay us a couple % interest.  But that is a long way off, and a big if.  I wouldn't want to push that on Kiva as it currently is. 

[Henry]

I'm up for whatever KIVA decides to do, they know their finances best.  If KIVA determines they can or need to pay interest - good, if they never ever ever discuss paying interest - good. 

I don't even think this is on KIVA's agenda at the moment, maybe it never was, and this was just a discussion topic?  Now that I think about it, I like agreeing with Charity - she said something much better. 

[Milford]

The way I see it, there probably will be a user option to give up on interests. This, in turn, would make it a tremendous effort to collect these interests from the borrower ("there's only going to be charged interest on 775 of the $1200 on this one" etc., probably even changing from month to month), thus I don't think the interest will stem from the borrowers. That only leaves the interest Kiva is already getting from the money the MFIs have paid back. To me, anyway. If Kiva is to give that money (or at least a substantial part of it) to the lenders, I suppose they'll be a lot more dependent on donations. So basically, I don't think this is a very good nor useful idea.

Also, I don't have a degree in economy, so I don't know what I'm talking about.