Paying interest to lenders - pros and cons

[Guest]

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[Kay]

dgandhi and Laurie,

I think those are both great ideas about what to do with interest that might otherwise be "returned" to the lenders:  1) "return" it to the loan recipient, to offset the interest burden on him or her, or 2) "return" it to Kiva, to help cover operating expenses--both as possible incentives to lenders to help "move" slow-moving loans.

I think we all have to remember that no organization, no matter how good-hearted its intent, can run on "fumes."  In other words, MFIs need to pay their people (other than volunteers), as does Kiva--and take care of other expenses.  That doesn't mean that anyone is getting "rich" working for any of the organizations involved here--at least I don't imagine so.

By the same token, when I said in my original two posts in this thread (replies #92 and 93) that I thought loan recipients should pay at least a nominal amount of interest (barring exceptions--which could always be all the loan recipients of any given MFI) so that they didn't think of their loans as "free money," I was thinking of something on the order of 1-2%--nothing more.  The HMO Kaiser Permanente, for example, used to charge (at least under some plans) $5/office visit to see a primary care physician; now I think it is $10/office visit--but only up to some maximum, to avoid gouging those with serious illnesses, who have to keep returning to their physicians, I imagine.  Regardless, I think the concept is the same:  charge the recipient of the service a "nominal" amount, so that he or she does not take it for granted.

I think we can all see that some persons asking for a loan on Kiva appear to be "better off" than others.  Now, maybe those persons are already paying higher interest rates (in a relative sense) than those "less well off"--I don't know.  Also, even for a given MFI, one sometimes sees loan recipients asking for a 2nd, 3rd, or 4th loan, for example.  That doesn't mean they don't deserve to get those loans--indeed, it should make them better credit risks--but you would think that once they have gotten their "feet on the ground," they might be able to contribute a little to offset the cost of providing them with their loans--and to ensure that others are able to obtain the same access to credit in the future.  So, my only point is that I certainly don't think any of these clients should be "gouged;" but I do believe, when capable, they should be charged a little interest--not necessarily to be "returned" to the Kiva lenders.  (Of course, MFIs may have to charge their clients much more than simply 1-2%--as is implied by the interest rates listed on the field partner pages--to ensure their own sustainability.)

In the end, though, for those who think "returning" interest to the Kiva lenders is a "bad" idea, what are your ideas (other than dgandhi and Laurie) to "move" slow-moving loans?  (I have already said, try to improve the picture "quality" and lessen the time for loans to be disbursed after they are funded.)

And to those who might no longer lend if Kiva "returned" interest on any of its loans (even the slow-moving ones), isn't that punishing the very people you would like to help?

Kay

[Laurie]

Hello, again.

Kay, with regard to the Kaiser HMO example:  I used to be a Kaiser member and, yes, I paid a per-visit charge every time I went to the doc.  Rather than help me to "not take it for granted", I was always annoyed that I had to pay even more for a service I already paid plenty for - especially when I was feeling "in need" (and, I freely admit, I am a big, freakin' baby when I am sick!).

The Kiva borrowers are already paying what seems to me like a LOT of interest - though I understand the various fees and charges, and I know the MFI's need to cover expenses.  I have no problem with that (charging borrowers a less-than-going rate of interest to cover costs).  However, I do not want them to also have to pay interest to ME - which you rightly pointed out they would not be doing.  Instead, it appears that it is the MFI which would be paying the "additional" interest we have been discussing  (so why not charge less??). 

As for the slow-funding loans, I agree with many of your points.  Personally, I have found I am not inclined to loan to borrowers who :

- appear relatively well-off compared to others (such as those from Azerbijian vs. those from Cambodia or Vietnam)
- are borrowing for home improvement rather than business expansion or increased profitability
- have a poor quality photo or poorly written/explained story.

I am very likely to loan to Iraqi borrowers, craftspeople, and those smiling faces with thoughtfully explained needs.

For me, it is all completely emotional.  If they touch me, I loan.  If they don't, I move on.  Totally personal, totally illogical, totally satisfying.  As I said, if the MFI's have some bucks to spare to get a slow moving loan to fund more quickly, I am sure I would be more responsive if I knew I was helping not only the borrower, but the wonderful people who created and sustain Kiva as well.

As always, I enjoy everyone's comments and thoughts.  One of the wonderful side benefits of finding Kiva is the discovery of such an articulate and thoughtful community of like-minded people.

Safe travels,
Laurie
writing today from Canyonville, Oregon, USA

[Kay]

Laurie,

I appreciate your response (though I know it's not directed only to me), because I figured maybe I had just put my foot in my mouth once again (and maybe I have)!

In any case, I am actually a Kaiser Permanente member myself (have been for many years), and I am annoyed by those co-pays--but maybe because I think Kaiser should have left them at $5/office visit--because that's what I would call "nominal!"

That said, I certainly agree with you that many of the Kiva borrowers seem to be paying a lot of interest--but, I guess in many cases, that can't be helped, due to the expensive nature of providing microloans.  So, I also agree, that I would not want them to pay more, on my behalf.

And, for me, too, the decision to loan is primarily an emotional one--based in large measure on whether a picture "grabs" me--with the "story" oftentimes playing a secondary (though not necessarily insignificant) role.  I can imagine, though, that if indeed, either the borrower and/or Kiva were "helped" by my making a particular loan (i.e., via the "return" of interest), that would probably persuade me to make certain loans I might not otherwise make--but only my actual lending experience could bear that out.

On another note, I am not against home improvement loans, because I think everyone deserves a decent place to live, and from what I've seen of the Kiva borrowers, they are hardly living in palaces!  And just as for business loans, these borrowers probably have few other (good) options for credit!  I would like some indication, though, of how the borrowers intend to pay back these loans, because many of the loan descriptions for home improvement loans now posted on Kiva are silent in this regard.  I assume the borrowers have jobs, if not businesses, but in most cases, that is not in the description.

Also, with respect to Azerbaijan, I am reminded of Felipe's post (reply #11) in the "Isn't Azerbaijan Trendy?" thread:

> Why Azerbaijan?  I was the one responsible for getting the first MFI to sign up as a Kiva field partner.  Outside of the capital city, Baku, you enter a post-Soviet world that looks like an atom bomb had been dropped decades ago.  The field offices are in buildings that are worse than what you'd see in the inner city slums of New York City or DC.  No lights in the hallways, broken windows, no running water, no functioning bathrooms, etc.  There are lists of borrowers (100+) hanging in the hallways waiting for enough principal to be returned by other borrowers so that new loans can be granted.  Kiva loans have cut those lists by 75%+.  If a borrower fails to pay back, it brings shame on the whole extended family, forcing them to move or gather together to make good on the loan.  They need as many little businesses as they can create to get their economy moving.  The Central government doesn't help out a whole lot.  I think Kiva lenders are really doing a great service here.  Felipe.

Also, from Ben Elberger (reply #5 of that same thread):

> 1.  Azerbaijani loans do tend to be funded the slowest and so sometimes the site will be left with them.  Every once in awhile, it will be heavily Azerbaijani loans and we aim to fix this as soon as possible.
> 2.  Many of the Azerbaijani businessmen and women put on their best for photos.  This may be important to keep in mind.
> 3.  The poverty line in Azerbaijan is definitely much higher than that in Africa or Asia.  Having said that, the microfinance institutions we work with almost exclusively serve a population of internally displaced peoples for whom some possessions may still remain (i.e. leather jacket) but for which credit is important to restart or begin a business.
> 4.  The microfinance institution market in Azerbaijan is significantly more developed than that in most African countries so they are able to post more entrepreneurs and handle greater capacity.

(Love hearing where you're writing from, Laurie--and safe travels to you!)

Kay

[nfolkert]

I trust that the businesspeople I loan to are capable of enriching themselves and their communities given sufficient access to capital.  If I did not trust that, then there would be no point in loaning.

Like all current Kiva lenders, I am obviously not concerned with making money in this process.  But if one believes that improving access to capital for these businesses is important, then I think it is short sighted to dismiss interest payments as an incentive for people to provide this capital to this market. 

Kiva and Prosper started within a few months of each other, and Prosper has managed to raise about ten times as much money as Kiva since then.  Granted, there are probably several reasons for this, possibly including relative marketing budgets, but if it is indicative, and offering interest would increase the pool of money available by an order of magnitude (either by including lenders who are more interested in making money, or by increasing the amount of money that people who say that aren't interested in making money are willing to put forward), then I would lean towards offering it, even if that meant that a minority of lenders who are insulted by the idea withdrew from the program.

Ideally, however, a compromise could be reached that ensured that interest-free loans were still available, and that loans that included interest payments would not increase the burden on the borrower, but rather split the profits between lender and MFI, staying as inclusive as possible, and maintaining the most important part of the mission -- reducing poverty by improving local economies and civil society.  Not sure what that balance is, but I hope for everybody's sake, in particular the borrowers, that Kiva gets it right.

[Kay]

Well said, Nathan.  The only thing I would add would be the option Laurie suggested (reply #111 of this thread) to "return" interest to the borrowers, to lessen their burden.

[Laurie]

On the theme of Kiva and Prosper:  I want to point out that typical interest rates on prosper.com seem to be in the 18% and up range, with many, many loans paying over 20%.    To investors willing to fund unsecured loans, those apparently are attractive rates.

The rates we are discussing for the Kiva loans are in the 1-3% range, I believe.  No serious "investor" is going to consider this as a sufficient return on investment - my credit union money market account is paying that much and I can tap it anytime I want.  Kiva and Prosper are different animals, in my opinion, and I personally don't believe this low rate of return would produce a large increase in the capital available to the Kiva borrowers as a whole.

I will continue to loan regardless of the outcome of the interest rate decisions - as long as the borrowers do not see an increase in their payments in order to fund a return on invest to the lenders.

Safe travels,
Laurie

[Odette]

Laurie,

Your paragraph: "I will continue to loan regardless of the outcome of the interest rate decisions - as long as the borrowers do not see an increase in their payments in order to fund a return on invest to the lenders." says it all for me.

Also, I do not think a 1 or 2% interest will provide much of an incentive to lenders, at least not enough to hasten a loan.

[Kay]

Laurie and Odette,

I'm glad to hear of your decision!

Kay

[nfolkert]

Interest rates on Prosper vary according to credit grade, with interest rates of 18% indicating a very high risk loan (a credit grade of "D" or worse) with a high enough expectation of default (6.2%) to warrant increasing the price that the borrower must pay for the loan.  If you look at the interest rates offered to borrowers with a credit rating of "B" or better (which historically indicates a default rate of less than 2%, which is the typical default rate for microlending, though Kiva's current default rate is much, much lower), the interest rates are about 12.5-13% (if Kiva's default rate stays as low as it is at 0.34%, which is unlikely, that would put it more in the range of the 8% interest to AA credit grades on Prosper).

Kiva's average interest rates [edit: rather, Kiva's MFI partners' average interest rates] are around 14%, with some MFIs offering loans at very low rates and others offering loans at much higher rates (though always below the local market rates).  I don't think the MFI partners would be able to offer very high interest rates to lenders, but it doesn't look prima facie unreasonable that they might be able to give interest rates competitive with money market funds.  To make up for a 2% default rate and 2.5% inflation rate, you'd need to provide interest of a little over 4.5% to break even.  I don't see any reason why this would be impossible to provide without adding additional burden to the borrowers.  Maybe it is.  You'd have to look at what it takes to make the MFI profitable (or sustainable if it is a non-profit), given that the capital is being made available essentially for free to them to distribute.

[RichardF]

Laurie, most lenders at Prosper are going to be lucky if they don't lose money in the deal.  That's why I stopped lending there.  And besides, it's better and funner to lend at Kiva!