MFi Guarantees for delinquent loans -are lenders still connected to borrowers?

[Guest]

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[waywardcats]

[5] MFIs guaranteeing loans Kiva borrowers:
This topic caused some concern among KFs.  The fact that there are MFIs who are guaranteeing the loans they have "sold" to Kiva effectively says that the default risk has not shifted to Kiva lenders, in which case a Kiva lender cannot truthfully say that that borrower's loan is in our loan portfolio. Transparency demands that these guarantees stop.  Maybe if they stopped the guarantee, the MFI Field Partner would have enough to cover currency risk.

[5a]  So tell us if you would please, which MFIs guarantee the loans for their Kiva borrowers?

[5b]  I just received this journal and I thought it might be a good case in point for the conversation on guaranteeing loans.

The Viv ansanm Group

$1,275.00            Loan Amount
83% repaid

Quote from Journal entry:
Sometimes outside economic pressure are so strong that they have a crushing impact on our moral structure. This is the apparent situation in which we find the members of the Viv Ansamn Group. After repaying their first loan without missing a step, thirty days after their 2nd loan should have been repaid the individual who paid back the most is only 50% repaid. There is one individual who only came to one repayment meeting, afterwards she moved from the area and is nowhere to be found. The loan officer responsible for the group, Kenas Metelus, realized that the loan was going to be difficult when he attempted to visit associates who missed repayment meetings and didn’t find them at home. What made things more difficult for him was when he asked other people in the community, they claimed to have never heard of such people, in some cases. All attempts to encourage repayment have to date been unsuccessful. The president of the group, Lutherking, who had a better relationship with the associates than the loan officer has been unable to find the other associates and even repay her own loan. There are several different accounts circulating about the cause of the default, some blame the global economic pressure and difficulty, others say it is the type of businesses that these associates were involved with that hit a bad cycle, whereas others still say that the default was on purpose and planned by the members of the group. We here at Esperanza are still unsure of the specific cause and are still involved in activities to encourage the group members to repay the loan. On behalf of Esperanza, we thank you for your support.

If the loan is already 83% repaid then it seems obvious that Esperanza is guaranteeing this loan.  As a lender to this group who will apparently have no repercussions from this possible default I have to say that I really do feel quite disconnected from my entrepreneurs at the moment.

In any case, perhaps instead of worrying about which MFIs are doing this, can we discuss with Kiva ways to stop it?  Because if I am not really accepting the risk for my loans, then as a lender I am not really connected to these entrepreneurs at all but just a source of extra capital for the Field Partners.

DISCUSSION:
In the new-ish feature in the loan repayments schedule table, information is now available in the Show Advanced table details on why a loan is delinquent. If you click on the word "Comments" in the right-hand column of the repayment table, you will see the new choices "Entrepreneur behind in repayment" and "Field partner behind in repayment". This data is meant to help expose whether it is the borrower who is behind in paying, or the MFI. This is the first step in showing which MFIs cover defaults or non-repayments from their clients: if the loan seems to be repaying monthly, but the link shows "Entrepreneur behind in repayment", that would indicate that the MFI is covering the loan.  There are valid reasons why some MFIs will want to do this: they perceive, accurately, that there are risks to their reputation if their Kiva loans do not repay, and may want to mitigate that hit to their reputation by covering their borrowers' Kiva loans, to some degree.  Liz's question to you is whether you would still find it a loss of connection to borrowers, in a significant way, if an MFI elects to cover loan non-payments yet this information is exposed and reported on?

Liz also mentioned that it is not safe to assume that the group guarantee isn't still in effect even if it seems (as with the Haitian loan cited above) that it couldn't possibly be covered.  She will specifically ask for this particular loan to be looked into, and will let me know if she can find out more about why it seems to be being repaid, when the Journal seems to indicate the borrowers are not paying.

Thanks Diane / KF Liaison for getting this answer.  I thought I would start a new thread in order to elicit more comments.

In regard to Liz's comment about the new explanations being available in the repayment table, I am sure that will be very helpful once the new repayment reporting tables are fully up and running.  I am not sure that is true as of this moment.  Looking at the loans that I have which are marked delinquent in my own portfolio I see this:

Jennet Lum Pefork in Cameroon - her loan is marked simply "Delinquent" which when you look at the comments this is explained:

Delinquent: The due date for the repayment has passed and the funds have not been returned to Kiva lenders. This can be due either to the Entrepreneur or Field Partner falling behind on repayment. Click "Show Advanced" on the repayment schedule to see an explanation of why the repayment is late.

However, payments on the loan appear to be current.  Of course this is a GHAPE loan which typically have unusual repayment schedules and that may be the issue.

if we look at this loan though to Chanthy Khoem we find that indeed this is marked "(Entrepreneur behind in repayment) " which is explained in the comment section:

(Entrepreneur behind in repayment): The Field Partner has reported not collecting the funds from the Entrepreneur.

That is a little more explanatory, but not much, there is no way to determine WHY the entrepreneur is behind without a journal supplementing the information.

So, all that to further explain why I say this:

On the What is Kiva? page is written

Kiva's mission is  to connect people through lending for the sake of alleviating poverty.

Kiva is the world's first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs around the globe.

The people you see on Kiva's site are real individuals in need of funding - not marketing material. When you browse entrepreneurs' profiles on the site, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend to someone else in need.

Emphasis added.  I understand why Kiva uses Field Partners, it is without question a necessary step in the process.  Let's review for a moment that process.  I go to the Kiva website, and I find a borrower I like.  Let's say this one:

Mamuna Wanra. 

But wait! I see that Mamuna already got her money!  Her loan was disbursed on April 16th.  "No problem" you tell me, when I loan to Mamuna I am reimbursing the FP for money they have already put into the field.  But you are assuming the risk from the Field Partner so you are still connected directly to the borrower.  Oh, ok then. 

But wait!  Now the Field Partner is concerned that their reputation will be damaged if Mamuna cannot repay her loan, so they will repay me my money regardless.  But they will tell me when they are making me whole on her behalf in order to protect their reputation.  Really?

Liz's question to you is whether you would still find it a loss of connection to borrowers, in a significant way, if an MFI elects to cover loan non-payments yet this information is exposed and reported on?

Speaking for myself, I have to say that I do not see the connection to the borrower in the first place in this scenario.  There is no connection to the be lost if Kiva lenders are providing risk-free capital to the field partners.

-Kerry-

[AccountAbility]

I think your question hits at the very foundations of Kiva. On Kiva Friends and elsewhere, I see any number of Kiva lenders who have an altruistic bent and want only the best for the borrowers-- even to the extent of offering to forgive the loan if circumstances beyond the borrower's control prevent repayment.

On the other hand, I also see many lenders who don't seem to want to know the details about how the borrower's payments are made or transmitted -- only about when do they get their expected re-credits.  I can only surmise that this group's thinking was in the forefront when PA2 was rolled out-- suddenly everything was focused on the lender's re-credits with little focus on the borrower at all.

I think Kiva is slowing improving the information which borrower-focused lenders desire and I am hopeful it will continue to improve. 

But this issue of MFI Field Partner guarantees really pits the one group against the other in terms of preference.  The former will mostly say "I want to know the truth about my loans and the borrowers I lent to - even if it is bad".  The latter might well say, "It's the MFI Field Partner's responsibility to underwrite so why shouldn't they bear some of the risk if they lend to an untenable situation."

I suspect that the issue for the MFIs is more than keeping reputation, however.  I think it also has to do with their own level of accounting that can keep track of and report individual loan delinquencies and defaults.  It is so much simpler for them if they treat all funding sources identically.  Their other credit sources are not expecting anything less than full payment just because some individual loan is delinquent.

Dan

[Jane Sladen]

I'm a simple lender.  I see a photo, or a loan that speaks to me, and I lend when I can.  If I get the money back, that's good.  If I don't, it's a risk I am willing to take.

I don't really feel the need for all this analysis about who pays/guarantees/whatever, to feel connected.  I just read the description, and "go for it", hoping that I have made a difference.  I am not trying to criticise you folk out there who are worrying (?) about this issue.  I am just glad I can help, and sit back, letting the rest of you try to sort it out!

Jane Sladen.

[Canadian Here]

I agree with BOTH Kerry and Jane Sladden, because BOTH scenarios are really about the same loan, if that's possible...

In Kerry's scenario, the "connection" with the borrower is dubious, at best. The "connection" is more accurately, with the MFI, who is being reimbursed for money they have already lent to the borrower. Is this a "bad" thing? Not necessarily, unless the one-on-one "connection" to the end user of the funds is important for you. It isn't huge for me. There are a lot of other Kiva issues, for me, that are more important.

My personal viewpoint is pretty well expressed by Jane Sladden, which basically says, I loan on what I see. I don't concern myself about whether or not the borrower has already got her/his money from the MFI. If I now reimburse the MFI, I guess they can fund another borrower. I hope to be repaid . Sometimes, I'm not. MFI fraud bothers me. I don't mind losing a bit of money to people who are trying and can't make it. I really object to MFI fraud.

So, while not FULLY "transparent", in this case the lack of transparency does not cause me much concern. The first page of the loan tells us when (and if) the funds were disbursed to the borrower by the MFI so the information wasn't hidden from us. I think that's important. IMHO, that's "transparent" enough.

Lorna

[waywardcats]

But I also think its dangerous for the MFI, if his behaviour is known to the borrowing community: An MFI who is known to pay missing payments by himself (to protect his reputation) might attract a different borrowing clientel than planned and is in grave danger.
In this context, I also see the whole Kiva-Plattform/MFI chain a bit at risk. MFIs might be a top MFI on this plattform, but the same MFIs might have financial trouble in the meantime.

Thanks to everyone for your comments so far, I think everyone has raised some good points.

schlapke , 

In response to you I will quote from the "What is Kiva?" page on the Kiva website

Kiva partners with existing expert microfinance institutions. In doing so, we gain access to outstanding entrepreneurs from impoverished communities world-wide. Our partners are experts in choosing qualified entrepreneurs. That said, they are usually short on funds. Through Kiva, our partners upload their entrepreneur profiles directly to the site so you can lend to them. When you do, not only do you get a unique experience connecting to a specific entrepreneur on the other side of the planet, but our microfinance partners can do more of what they do, more efficiently.

Kiva addresses your point here very well.  Kiva Field partners are usually "short on funds" and covering loans that are not repaid does nothing to alleviate that situation, it in fact further degrades the financial health of the FP.

I do think also that there is some level of inconsistency here with Kiva's position that concerns me.  On the one hand lenders are told that Kiva Field Partners need help with currency risk because it can compromise the financial health of the MFI to assume the full currency risk.  On the other hand they are able to cover borrower repayments that they have not received simply to protect their reputations.

Now, Dan may be correct that other funding sources do not look at actual repayment statistics and just expect the full amount of their money back.  If that is the case, and the MFI wants to treat Kiva like those other funding sources, then no loans should ever be defaulted on Kiva for any reason except MFI collapse or fraud.

So I think you are right in that if some FPs guarantee all their loans, they will certainly become more popular with some lenders.  They will certainly have financial issues if they have to cover too many loans, unless their plan is to pass those costs onto their other borrowers.  A situation I would not like to see.

Lorna and JaneS,

 I think your positions are perfectly fine, and are probably shared many lenders out there. 

My concern here is two-fold.

First, I would like Kiva to either be what it says it is i.e. a person to person lending platform or to accurately describe what it is on the website.  At this point I am not sure how it can be described exactly, but person to person seems to get further from the truth the more information we glean.

Secondly, the financial health of Kiva Field Partners should be a concern to all Kiva lenders.  MFIs come in many different shapes and sizes and it would be unfair for the larger for-profit institutions to protect their reputations on Kiva by guaranteeing defaulted loans when smaller, non-profits may not be able to do the same.  Also, if some Field Partners are giving an inaccurate picture of what is taking place on the ground then it may hide financial instability from Kiva and Kiva lenders.  Finally, as I have said above, but I think it bears repeating.  If FPs are guaranteeing defaulted loans, the money has to come from somewhere.  I would be very distressed to learn that the poor were paying higher interest rates so that MFIs could have a better reputation on Kiva.

-Kerry-

[AccountAbility]

Based on the topic of this thread, the issue still comes down to our Liaison's reiteration of Liz's question:

"Liz's question to you is whether you would still find it a loss of connection to borrowers, in a significant way, if an MFI elects to cover loan non-payments yet this information is exposed and reported on?"

I personally find the question somewhat strange.  If the covering of non-payment is a reputation issue, how can exposing and reporting them help preserve reputation?  (Or is it just that if you bury the fact in the fine print most people just won't notice so therefore reputation is effectively unimpaired).

I agree that many lenders just want to keep it simple. Regretfully "transparent" is often not simple.  So Kiva is stuck walking the tightrope between those two goals.  

I suppose the best that can be worked out is to have the top obvious level as simple as possible, with deeper levels available for those who want to drill down and see the "transparent" detail.

Apparently the Kiva Fellows' Blogs on MFI Field Partner repayments have recently opened new vistas of transparency--just like Premal's proposal on currency risk.

Dan

P.S. Having just read Kerry's post as I was writing this, all I can say is that my perception is that virtually all the loan defaults on Kiva HAVE been due to MFI problems, not actual borrower problems.

[Canadian Here]

Having just read Kerry's post as I was writing this, all I can say is that my perception is that virtually all the loan defaults on Kiva HAVE been due to MFI problems, not actual borrower problems.

Dan: I agree, providing the 'qualifier' "virtually" is used, as you have done. I have afew loans in my portfolio, delinquent from the get-go, but not yet formally in default, which are not related to MFI fraud or incompetency.  Albeit, these loans are in the minority, but I do have  afew of them.

Lorna

[YowieFreak]

Looking at the loans that I have which are marked delinquent in my own portfolio I see this:

Jennet Lum Pefork in Cameroon - her loan is marked simply "Delinquent" which when you look at the comments this is explained:

However, payments on the loan appear to be current.  Of course this is a GHAPE loan which typically have unusual repayment schedules and that may be the issue.

This loan is technically delinquent based on the repayment schedule in Kiva because $138.88 (i.e. 4 x $34.72) should have made its way back to Kiva by April 15, but only $104.17 (i.e. $20.83 + $41.67 + $41.67) actually has been paid back so far.

However, the description of the loan states "Jennet plans to pay her loan in 18 months, with the first installment being repaid four months from the date of disbursement".  According to that description, the lender appears to be two weeks in advance on their repayments as the DoD was on Oct 27 and the first repayment should have therefore been due on Feb 27.

So this is almost certainly a case of a "default" repayment schedule being set up when PA2 was introduced, or a repayment schedule being incorrectly set up by the MFI very soon after the PA2 introduction (before the MFI was fully conversant with what they should or shouldn't be entering into the system).

These sort of anomalies will gradually disappear from our portfolios as more and more of the older loans get repaid.