What Would a Completely Transparent Kiva Lending Model Look Like?

[Guest]

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[RichardF]

MFTransparency's working definition of transparency for the microfinance industry is short and sweet. "All operational rules, calculations, and data sources are made public."  (KF discussion)

If Kiva were to adopt such a definition for its own operational rules, calculations and data sources, what would a completely transparent Kiva lending model look like?

For starters, I can think of two basic types of data that should meet this transparency standard, Field Partner interest rates (KF discussions, near middle of list) and the Field Partners Risk Rating System (KF discussion).

For example, when MFTransparency has interest rates available for a Kiva Field Partner, the rates for each type of loan should be posted on the partner's profile page.  In addition, the interest rate that applies to each loan listing should be posted directly on the listing.

While the general factors included in the FP Risk Ratings are outlined, this information should be expanded to describe the actual methodology for how the Risk Rating is calculated.  The next step would be to include the information used to calculate the Risk Rating on each Field Partner's profile page.

What other steps should be taken to have Kiva meet the MFTransparency definition?

[RichardF]

Loan Payment Schedules and Reporting

When distinct loan payment schedules are know to Kiva, they should be reported on the Field Partner page and the specific loan listing page.  For now, Kiva is set up to report payments on a monthly basis, regardless of the schedule (shorter or longer).  Shorter, e.g., weekly payment schedules are not as problematic for transparency as longer, e.g., end of loan payment schedules. 

For starters, Kiva needs to update its accounting software to reflect the actual payment schedule that applies for any given loan.  For example, when a payment is not due, the loan should not be marked as delinquent simply because the software assumes monthly payments.

The more troublesome transparency issue occurs when no information is recorded when a scheduled payment is due.  Regardless of the schedule, an update note should be posted to the listing page when a payment is due (or monthly for shorter periods).  Right now, updates are either automatic or manual.  Automatic notes presume acceptable progress on loan payments.  Those updates should be regularly audited for accuracy and revised as needed.  Overdue manual updates should be overridden with an automatic comment as such and an audit should be triggered. When the audit is complete, the automatic comment should be updated with a reason why the payment has not been registered.  At the very least, these reason codes should distinguish between Field Partner issues and entrepreneur issues.  Beyond that, reason codes should include the full range of reasons why a scheduled payment was not made on time.

[RichardF]

Loan Funding Rate

It appears a new Kiva metric is about to become useful, the loan funding rate.  Until now, the funding rate for all Kiva loan listings has been 100%.  That may be about to change.  When it does, it will be useful for Kiva to report the loan funding rate for many of its common demographics, e.g., Field Partner, country, region, sector, activity, gender, individual/group, loan amount and loan duration.

[AccountAbility]

Loan Payment Schedules and Reporting
For starters, Kiva needs to update its accounting software to reflect the actual payment schedule that applies for any given loan.  For example, when a payment is not due, the loan should not be marked as delinquent simply because the software assumes monthly payments.

Richard - I seem to remember Premal saying that a roll out of a new software module would be much more sophisticated in handling repayment variables and effective interest calculations.  He said it was aimed for 3rd quarter this year but if it missed that deadline would have to wait until the 1st quarter of next because of holidays, year-end etc.

So it does seem as though we are moving forward (or at least aiming to.  )

Dan

[RichardF]

Sure. 
But I also would say Matt endorsing MFTransparency has raised the bar even higher! 

[RichardF]

A Wikipedia buddy of mine recently shared an article he started, Flat rate (finance).

Flat interest rate loans are often used by traditional moneylenders in the informal economy of developing countries. They are also used by many microfinance institutions. One reason for their popularity is their ease of use. For example, a loan of $1,200 can be structured with 12 monthly repayments of $100, plus interest, due on the same dates, of 1% ($12) a month, resulting in a total monthly payment of $112. In the example to the right, the loan contract is for 400,000 Cambodian riels over 4 months. Interest is set at 16,000 riels (4%) a month while principal is due in a single payment at the end.

Flat rate calculations, which are based on the amount of money the borrower receives at the beginning of the loan rather the average amount the borrow has access to during the loan, have been outlawed in developed countries (see for example the Truth in Lending Act). However, they persist in many developing countries, and have frequently been adopted by microcredit institutions.

They are also sometimes used by on-line microlending operators. For example, kiva.org quotes interest rates as the "self reported average, annualized, flat interest rate in real terms charged by the Field Partner to the enterpreneur."[1] For a variety of reasons (see below), flat rates can be useful in lending to poor people, and often disappear very slowly as financial systems develop.

This article goes on to discuss flat rate calculations, how they under-represent the annualized effective APR, benefits and problems with flat rate microfinance lending practices and some related consumer protection issues.

In terms of transparent Kiva Loan (Re)Payment Schedules and Reporting, this article reminds me of the notion that each Kiva Entrepreneur profile should contain a complete amortization schedule that includes for each periodic payment (made by the entrepreneur), the amount of principal, interest and fees due.  Only from this complete information can a truly comparable APR be determined from the typically represented Kiva flat rate loan.