Paying interest to lenders - pros and cons

[Guest]

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[Laurie]

I had never heard of Prosper before I discovered Kiva.  After I noticed mention of Prosper on Kiva Friends a few times, I took a look at the website.  I was amazed!  Personally, I can't imagine investing my money with 95% of the borrowers there (well, actually, 100% but who knows, maybe some of them actually will be able to pay it back), but apparently other people feel differently than I do - for which I am sure the borrowers are grateful.

I came to Kiva intending to "invest" the funds I typcially donate to charity/non-profit groups.  I figured I couldn't lose: if the borrower repays the loan, I can make another loan; if not, it was a donation to someone I hope I helped.  With such a low default rate, Kiva loans certainly seem more like loans than donations, but I look at the repaid money as a recycling pool of capital, rather than an investment.

Yes, definitely "funner" than Prosper.  Funner than many things, yes?

Safe travels,
Laurie

[dgandhi]

The basic fact of the matter is that the MFI's already charge interest to the recipient based on the bank loan rate they would get from a local bank. If invester%+kiva% < bank% then the MFI still makes more money then they need (no fumes required).

I am only suggesting that kiva strike a deal with the MFI's to pay that interest, and allow the loaners to pass a lower rate to the recipient by taking a lower return.

I do not think anybody is advocating raising rates for recipients, or increasing the rate the MFI pays to beyond what they budget for from a bank.

I advocate collecting interest for two reasons

1) increase investment (by at least matching inflation in post-industrial contires)

2) create a mechanism to pass the savings back to the recipient.

Lots of people are saying they would not lend if interest were an option, but they disreguard that it might be in the recipient and MFI's interest if it was.

[Ramón]

@gdandhi: I think the discussion was centered around the Kiva LENDER receiving interest on the money they receive. However, you make a valid point:

I think it is a moral obligation for a Kiva lender to ask an MFI, especially to commercial MFIs: Now that you are getting part of your funding for a lot less money than you local bank can give you, what extra are you doing for the borrower? We want our free money to be an investment towards an entrepreneur, either directly (less interest to be paid by him/her) or indirectly (organize training sessions, develop new loan programs to address even poorer entrepreneurs, stabilize the MFI, set up a savings fund, etc.). What do you do?

I have seen good answers and bad answers to these questions when I tried to dig a little deeper on MFIs. But mostly... no answers.

--Ramón

[dgandhi]

I have seen good answers and bad answers to these questions when I tried to dig a little deeper on MFIs. But mostly... no answers.

This is exactly why I think using the already budgeted interest could speed this up, and work to everybody's advantage.

If the MFI credits us the interest they would pay the bank, give kiva 2%, subtract inflation and then give us the option of

1) taking whats left.
2) applying it to the principle on the loan.
3) applying it toward MFI run education programs.

these decisions being made before the loan was distributed, the recipient would simple be told they were awarded a better rate if the loaners chose option 2, otherwise they would get what the same thing they already agreed to, no loss either way.

This gives loaners personal say in how to distribute the profit from their "free" money, and have a direct impact. This seems more practical to me then waiting for the MFI's to each come up with a plan of their own, and then having loaners pick MFIs based on which reinvestment plans they like.

[AccountAbility]

I've been out of town for a bit and boy have you folks been prolific!   I will just reiterate that the interest I seek is more journals, better loan write-ups and more information about the MFIs.  Improving these will cost more, which I am prepared to pay for by forgoing interest.  I think the transparency revealing more of the entrepreneur/borrower situation would go a long way toward increasing Kiva supporters and thereby increase loan volume.

I am still skeptical that altruistic lenders and investment lenders can be equally served within the same system, but some good ideas have been brought up and maybe there is a way.  But I wouldn't want a good thing to be ruined by trying to be something different than it currently is.

I have seen the compliance budgets of investment firms (at least in the USA) and am concerned that Kiva will not be able to avoid such expense. If they cannot, the extra expense incurred by Kiva will offset the benefits hoped for.

[samvado]

I just put $500 into kiva, that's about as much as I am likely to under a 0% interest situation, if they could come close to online saving account (say 4.5%) I would happily put $20K in, no problem.

a bite late (the quote is from april) but I would have to agree. I put in $ 800 and that'll be it unless and until I see two things coming up as options for those who want them:
1)  Insurance against default of KIVA (with the prospect of total loss of all of my investment)
2)  Saving account (say 4.5%) interest - to offset inflation and the (rare) default of individual loans.

I am sure there are a lot of people out there having a low-risk pension fund of some kind thats not paying a lot of interest who would be willing to shift that to Kiva if some measure of security was offered. The monetary input could well rise 10-fold or more.
And I dont see how it could hurt if its done as an option. IMHO if its cash shortage that hinders MFIs from expanding that should be addressed - not catering to the feelings of those who must have an interest free environment to be OK with Kiva. In the light of the fact that its only interest free for the MFI - the more so.

hope I didnt hurt anyone's feeling :-)
my 2 cents from germany

-sam

[AccountAbility]

As an example of the complexities which will be created if Kiva attempts to get into the investment arena, US pension funds are prohibited from investing in oversees investments of this nature.  So pension assets are out (again just speaking of USA).

[cpbailey]

What would happen if there were a loan duration of xx hours.  After a loan were posted for xx hours, then the remaining balance would receive interest.  This would hasten those who want Kiva to remain altruistic to bid on oldest loans...

Colette

[RichardF]

Do you want $5 for making four $25 loans?  Then read about "Donate Cards". 

[RichardF]

Here's a comment I found interesting from Matt Flannery's Kiva Chronicles: 2007-04-09 Early User Data.

• 75% said the would disapprove if Kiva were to become a for-profit company; almost 50% said they would no longer lend.

We have a user base that highly favors the non-profit model.  That doesn't surprise me too much since Kiva is a non-profit and these are folks which really like Kiva.  It will be interesting to see how they react when Kiva (as a non-profit) offers interest rates on the site.

"It will be interesting to see how they react when Kiva (as a non-profit) offers interest rates on the site."? 

I predict a lenders' revolt!   

That said, I'll reiterate my support of the move.  In the long run, I believe offering a modest amount of interest (in the savings account to money market range) will help fund more Kiva entrepreneurs.  And that's the point of it all.