Relative Portfolio Risk

[Guest]

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[YowieFreak]

I get the sense, but tell me if I got this wrong, that some of you are happy with the KIVA 5 star system and are quite content if the stars are allocated ones and stay the same over time.

Guido,

http://www.kivafriends.org/index.php/topic,3147.0.html is the thread regarding the star system.

Most of the comments in there are saying that the Kiva 5 star system needs to be changed greatly to be of much use, so I'm not sure where you are getting the sense of most people being happy with it.

Ian

Edit:  My apologies - you only said "some" were happy with the system.  In that case, you are probably correct.  But, no matter what system is set up, you will almost always find some people that are happy with it.

[Visitor Number 1]

In short, the KIVA 5 star risk system requires a good overhaul and would best be integrated with the MIX public data. Why trust this to (over-worked) KIVA staff when you can outsource it and lean on the vast amount of research done by MIX. On top the 5 star system ought to reflect  the changes that occur from year to year in each MFI, especially in regard to the quality of their loan portfolio.

Guido

How would you suggest handling MFIs that are not currently listed on the MIX?  There are several Kiva Field Partners that come to mind:

- Action Now: Kenya
- ADEPHCA (Nicaragua)
- Patan Business & Professional Women (Nepal)
- GHAPE (Cameroon)
- Kismunu Medical & Education Trust (Kenya)
- Pearl Microfinance (Uganda)
- Tujijenge Tanzania

Correct me if I'm wrong, but isn't the data on MIX self-reported?  If a Field Partner is not listed on the MIX, then it appears Kiva's due diligence and risk assessments do have some value.

[wthepoo]

Your external partner, KIVA, from which you get some money not the bulk of money of course...), has allocated 1-5 stars to your MFI indicating KIVAs initial perception of how risky your MFIs is relative to all others that KIVA deals with.  Even if KIVA is right on its initial allocation, this does not mean that over time the risks of dealing with a particular MFI remains the same (relative to all others); hence the stars should be updated from year to year or whenever there are major changes in the operations of an MFI.

That's exactly what happens, Guido... star ratings DO change occasionally.

I am not particularly happy with Kiva's star system, don't get me wrong, and I think that some important features are missing (like a star history and a date stamp with any change). But I appreciate that repayment likelihood cannot just be derived from last year's (at least mostly:) self-reported data or a ranking that integrates outreach factors (MIXmarket data, btw, already plays a role in determining Kiva's star rating). So you may call it absurd and me foolish but I am in general rather willing to trust an assessment and star allocation by Kiva (based also on self-conducted due diligence and business experience) - even though they seriously got it wrong, before.

And one other thing: Don't confuse Kiva's star rating with an indicator as to how well an MFI performs - it is "just" an indicator regarding the likelihood of repayment. The latter is much less prone to change from year to year. It also justifies, IMHO, why so many MFIs have 4- or 5-star-ratings.

Best wishes,
Wolfgang.

[ulrike]

The interest free capital that MFIs receive from KIVA is for most of them just "frosting on the cake": take all the MFIs in Asia (2007 MIX data), rank order them by gross loan portfolio and you will find that the top 100 maintain portfolios ranging from $3 billion to $6 million. Now take the Asian FPs list, rank it by total portfolio of loans and you will find that even the largest one only has total loans of $1.7 million. Hence for an MFI to accept KIVA money is a nice way to reduce their borrowing costs by maybe a few basis points (...that is 100st of one percent). Specifically if an MFI borrows 95% of its money at 12% and gets the remainder 5% free from KIVA, it lowers its total borrowing costs by 60 basis points. That is a savings of $6,000 on a gross portfolio of $1 million!

...
The hassle is accepted mainly by a few startups and MFIs who have other interests

Hi Guido,
When I did calculate if KIVA is interesting for MFI's I came at first to the same conclusion as you, that in fact KIVA doesn't seem to make a bit difference. When you calculate the borrowing costs  you have to add the costs for supplementary work like taking photos, uploading photos and description and to include the currency risk (or the insurance against currency risk). So why do MFI's use KIVA money? I think because they do not get easily money elsewhere and that's where KIVA really makes a difference. Another important point for Kiva is to get people  across the world closer, which has nothing to do with money but is very important for peace in the world.

Should Kiva take fees from MFI's? I think MFI's which are profit organisations and make profit they really could and should participate financing Kiva. MFI's which are starting or a non-profit should not pay.  But this needs new contracts and new developments for KIVA. We'll see this perhaps in future versions (PA4?)

Ulrike

[dokus]

Thanks Urike. I agree with you on the fees, profitable MFIs should cover the administrative costs of KIVA. If about half of all 1300 MFIs around the world make profit (and according to MIX statistics, not just a little...) question can be raised whether  KIVA should really deal with startup MFIs or MFIs who are not yet profitable? It appears contradictory to me that in promoting entrepreneurship among poor people -- even charging them high interest rates and demanding short repayment schedules-- that the MFIs should not be held to the same standard. If you read M. Yunus book about Creating a world without poverty, you will have noticed that at the Grameen Bank, the new Grameen II is now requiring that new branches are self-sustainable from the beginning (no more subsidies like was the case under Grameen I).

Guido
 

[greg3912]

http://www.socialedge.org/blogs/kiva-chronicles

This is Matt Flannery's latest posting for those who have not read it. I think it really speaks to this issue of relative portfolio risk.

Greg

[dokus]

Greg

Thanks for pointing this out. Matt Flannery is right about "the decline in remittances across the globe" but isn't the questions: too which extend do the "entrepreneurs" that KIVA lenders lend too actually depend on remittances? Most entrepreneurs do indeed depend on local consumption of goods and services, but does this not bring back the point that food, retail and clothing are probably safer sectors than most others?

Matt is also right about the reduced exports. My wife, who buys directly from women artisans around the world for the products she sells at e-maginativegifts (see http://www.e-maginativegifts.com), experiences this directly. Her sales last year were down, not a lot, but still lower than the year before that. Hence, reduced demand on the part of American consumers, is affecting all the women artisans and cooperatives my wife buys products from, currently in some 16 countries around the world.

The implications for MFIs extending loans to entrepreneurs, as well as for MFIs being less able to borrow money from wholesale lenders are obvious. IMO this underscores, however,  the importance of risk management by both KIVA lenders, as well as on the part of KIVA -- who now has increased responsibility to make sure that all the FPs it retains contacts with, are among the best vetted, the top most efficient, with largest outreach and highest transparency.   

"Kiva (maybe) a wholesale lender of a very unique breed" because it leverages the power of the internet but that does not mean that it can fall short of the highest lending practices maintained by commercial banks.  Last year we learned how "relaxed" lending standards, quick or paper-less lending practices, and some unethical or less honorable practices lead to the sub-prime lending debacle.

In this climate, KIVA ought to be less concerned with growth and more with transparency and risk management. More transparency on the vetting of FPs -- maybe even 'preventive closings' of FPs that may become risky -- and far more emphasis on risk management, esp. through creating awareness on the part of KIVA lenders of all the risks involved in micro-lending. This would appear IMO to me more important than the growth of lenders or volume of lending.

Guido
 

[ulrike]

In this climate, KIVA ought to be less concerned with growth and more with transparency and risk management. More transparency on the vetting of FPs -- maybe even 'preventive closings' of FPs that may become risky -- and far more emphasis on risk management, esp. through creating awareness on the part of KIVA lenders of all the risks involved in micro-lending. This would appear IMO to me more important than the growth of lenders or volume of lending.
Guido

Hi Guido,

I can't fully agree with your conclusion. Kiva has to defend several interests:

- the interest of the lender to  put his money in Kiva knowing which kind of risk he takes
- the interest of the lender, who wants to help plenty of people in the developping countries and naturally the interest of the borrower to have credits to make his work more efficient
- the interest of the lender and the interest of the borrower , who want  that Kiva doesn't stop working

The answers to these challenges are:

- transparency for the first: Kiva communicated a lot on the 98 % repaiement, which is  probably true if you put 1000 $ and spread the money around the  world , MFI's, activities. We'll have to wait if it will be true during the crisis we are living now. But more transperency for me does not mean that Kiva should only work with top ten MFI's and spend lots of money on auditing but just explain that there are risks and put this information on a  place where it is seen by everybody , even it is non-commercial
-  The main issue of  the lenders is to help people to get out of poverty. As  you and Matt described the developping countries are touched by the crisis and MFI's will have bigger default rates and less money to lend because of the wholesalelenders put less money in MFI's. So KIVA could be « anticyclic » and be able to raise money for MFI's and borrowers  in a more risky situation instead of beeing « cyclic » like the banks and  reducing the credits they distribute because after having taking too much risks with subprimes they don't take any risk at all or are no longer able to take risks.
- The last issue is to finance Kiva, which is finally a major issue for our money. We talked about the risk of borrowers, the risk of MFI's but finally if KIVA couldn't pay any more the infrastructure and some  people to make work the site since the last borrower has repaid we might loose the 20 (?)  million of Dollar which are in the system now. In the actual situation to finance KIVA we need new deposits, since people in re-lending mode don't donate much to KIVA. To get new deposits there is a need to have enough loans on the site. Since the PA2 system , which I think is very good because the the money should « work » and not sit for month in the accounts of KIVA, there are not enough loans on the site to make  new deposits to come in and the « hooked » users like us are less motivated to put in new money because relending allows quite a lot of loans and there are anyway no more loans on the site.

My conclusion:

I would like more transparency about risks (explanation, diminue star-rating because at least you « see » the risk, pause MFI's if there is a doubt),  but I want more loans (helps borrowers and KIVA and pleases lenders). The easiest way is to  authorize   MFI's to raise 40 %   on KIVA  and this would be anticyclic. The other way is to recruite new MFI's but it takes more time and costs more money. But  perhaps with the crisis and the problem of wholesale lenders there are other big  MFI's interested in KIVA.

Ulrike

[dokus]

Ulrike

My note was a reaction to the latest Chronicles from Matt: http://www.socialedge.org/blogs/kiva-chronicles. Matt's main concern about the financial crisis seem to be the impact on KIVA's growth...

I agree with you on the need for more transparency, not only about the operations of the MFIs but also the selection of MFIs by KIVA. 

There is also this "grand illusion" among many KIVA lenders that loans made via KIVA are "helping people out of poverty". Maybe some do, but is there evidence that the majority do ? Or put very simply, if someone keeps getting KIVA loans year after year, do they save enough to become more self-sufficient or actually move out of poverty? There is very little evidence so far on this.

It is also unclear whether the entrepreneurs looking for funds, are indeed belonging to the poorest in the country. From the pictures alone one can quickly see that some are indeed very poor (e.g. farmers in Cambodia)  but that there also many more which are already well off (women running a grocery store in Uganda, to name just one example). Hence, KIVA should  provide more information on what segments of the population the entrepreneurs belong to (say, extreme poverty, upper poverty, middle class, upper middle class; where the first two are clearly below the national poverty line and the last two are just above it). Many MFIs already are providing information of this kind.

Let's not have any illusions about reaching the poorest! A study that was recently made by the Asian Development Bank about micro-lending in the Philippines shows that in spite of all good intentions, the loans did not reach the poorest segments of society. Mr. Yunus in is latest book arrives at the same conclusion, although the progress made in Bangladesh (in terms of outreach) is amazing. 

Let's also not forget that micro-lending has become "big business" --half of 1300 MFIs around the globe are making decent profits out of it--; fifty million dollars is a drop in the bucket in this business...

KIVA should gear up to provide more transparency (e.g. integrate their data with the MIX data) and increase the awareness of KIVA lenders about risks, the actual outreach (what segments of the population are reached), as well as the effects these loans have on the borrowers.

Thanks for your reaction to my earlier note.

Guido
 




 

[ulrike]

There is also this "grand illusion" among many KIVA lenders that loans made via KIVA are "helping people out of poverty". Maybe some do, but is there evidence that the majority do ? Or put very simply, if someone keeps getting KIVA loans year after year, do they save enough to become more self-sufficient or actually move out of poverty? There is very little evidence so far on this.

It is also unclear whether the entrepreneurs looking for funds, are indeed belonging to the poorest in the country. From the pictures alone one can quickly see that some are indeed very poor (e.g. farmers in Cambodia)  but that there also many more which are already well off (women running a grocery store in Uganda, to name just one example). Hence, KIVA should  provide more information on what segments of the population the entrepreneurs belong to (say, extreme poverty, upper poverty, middle class, upper middle class; where the first two are clearly below the national poverty line and the last two are just above it). Many MFIs already are providing information of this kind.

Hi Guido,

 some time after your note some remarks:
The loans are surely   not helping people immediately out of poverty, but if they allow to eat and to send children to school and to give hope, I think this is a lot!
The fact that people get loans year after year is not necessarily negative, see the following example
 http://www.kiva.org/app.php?page=businesses&action=about&id=83953
Elisabeth is surely no longer one of the poorest, but it's great so see people progress over the years!

To help people which are not the poorest, like those who buy motocycles will have an impact on those who need motocycle taxis to move, so this type of loan helps to create development and helps poor people.
If you help to finance agricultural loans where part of the loan is used to hire workers, it's perhaps not ideal because people should better work on their own land, but at least if they don't have land they get work;

Another issue is about profit of MFI's. I had a closer look at  the MIX profile of AMK. AMK touches the poorest and makes quite some profit the last years. One of the reason is that they get funds at 0% interest rate. Is it moral to make quite a lot of profit on the poorest.?? What do they use the profit for? Is it used to expand and to help more people or to help people in bigger investments as they progress in live and ability to manage bigger businesses? It is really complicated for me to  make up my mind in this case, since I really don't like the idea to make poor people  work very hard to generate profits though finally they don't have a better choice and  appreciate that AMK loans to them. 

About KIVA providing more information on what segment the entrepreneur belongs to: I don't like this too much because I prefer to see the person and not his sociological status and the description gives anyway a good  hint about the situation of  the person. And  somebody who earns 2$ a day is no longer poor?  statistically  the poor are allowed only 1 $ a day!

Hve a nice weekend

Ulrike