Reaction to 4/13 NY Times piece

[Guest]

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[sgsilver]

I am a long-time lender and donor to kiva.org. However, after reading today's NYT article (http://www.nytimes.com/2010/04/14/world/14microfinance.html) which mentions Kiva, I have some concerns.

The article mentions Kiva in the following excerpts:

Unwitting individuals, who can make loans of $20 or more through Web sites like Kiva or Microplace, may also end up participating in practices some consider exploitative. These Web sites admit that they cannot guarantee every interest rate they quote. Indeed, the real rate can prove to be markedly higher.

and

At Kiva, which promises on its Web site that it “will not partner with an organization that charges exorbitant interest rates,” the interest rate and fees for LAPO was recently advertised as 57 percent, the average rate from 2007. After The Times called to inquire, Kiva changed it to 83 percent.

Premal Shah, Kiva’s president, said it was a question of outdated information rather than deception. “I would argue that the information is stale as opposed to misleading,” he said. “It could have been a tad better.”

While analysts characterize such microfinance Web sites as well-meaning, they question whether the sites sufficiently vetted the organizations they promoted.

Questions had already been raised about Kiva because the Web site once promised that loans would go to specific borrowers identified on the site, but later backtracked, clarifying that the money went to organizations rather than individuals.

Matt Flannery posted a response on his blog on Nov. 9, 2009 in response to two articles in the NYT that were largely critical of Kiva (http://www.kiva.org/blog?link=2009/11/09/todays-new-york-times-article.html). I hope that a response by Kiva is being drafted to address concerns raised in this most recent article.

Kiva discusses the issue of high interests rates in their FAQ section. However, the NYT article raises concerns that the interest rates reported for the individual microlending institutions may not be accurate.

I would like to request that Kiva clarify and address the following concerns:

1) To explain in detail how Kiva chooses microlenders, how they determine if a microlender is charging exorbitant interest rates and how microlenders are audited;
2) Why the information on the microlender mentioned in the article was "stale" and how Kiva is going to ensure that interest rates reported on its site are accurate (and why 83% interest is not considered exorbitant);

I would also like to request that Kiva make it clear which microlenders are for-profit and which micro-lenders are non-profit. To my knowledge, this information is not provided on Kiva's site. In addition, I request that this be an available filter in the search options so that lenders can have more choice with regard to the microlending institutions they work with.

To sum it up, I want my money to go to the people who need it, not to help companies earn profits on the backs of the poor. I also want more information about these microlending institutions to be available and easily accessible on Kiva's site.

I would like to continue to support Kiva, but this article has raised significant concerns for me that need to be addressed before I can continue with my support.

Thank you in advance for the clarification.

Steve S.

[FoxMoriarty]

I also just read the article and would agree that some additional transparency with regard to interest rates would be good.  Hearing that some microlenders are charging 80%+ in interest was a bit surprising.  To me, that's a very, very high interest rate that is in conflict with the goals and ideals of microlending.  But I also recognize that I'm not on the ground and don't know much about the economics of microlending in various countries.  A little more transparency and a direct response to the article and the questions it raised would make me a happy microlender.

Thanks!

[AccountAbility]

You'll have to forgive some of us if we don't jump in to respond to this article.  While it has some good points, it basically is a rehash of the same things with apparently less than full understanding (or even correct data in some places).

I would point you to another thread on interest rates here on Kiva Friends that has been going on for some time.  It is a complex subject and attempts to make it simple usually produce unfortunate distortions.

http://www.kivafriends.org/index.php/topic,368.0.html

Oh, and welcome to Kiva Friends.  We are just a bunch of people not connected to Kiva who have engaged around its work and concepts.

Dan

[FoxMoriarty]

Thanks for the response Dan!  I admit that I am guilty of not actually searching the forums for a thread specifically on interest rates.  That thread is very informative and answered my questions.  Thanks for pointing me to it!

/Rob

[sgsilver]

Thanks for your response and for the link to the other thread. I read the thread, but my concerns still aren't addressed by what is discussed there. In fact, I would even add an additional suggestion of having the reported profit margins clearly listed on the profiles of the microlenders.

If you could point out where in the article incorrect data was reported, that would be helpful.

I understand that Kiva Friends is not directly connected to Kiva, but I assume that the Kiva staff read these forums and hopefully will respond here or on their site shortly.

Thank you,
Steve

[Peter S]

I assume that the Kiva staff read these forums

They do sometimes, and I noticed that Kiva's Customer Service Manager, Gerard Niemira, was just now listed up at the top of this thread as someone who has been reading it recently.

Posting your questions here isn't guaranteed to catch Kiva's attention though, and I suggest if you want to pursue it, you could repeat the questions (which I believe you are perfectly justified in posing) in an email to contactus@kiva.org - that should ensure you get a response of some kind, if Gerard or other Kiva staff members do not see fit to join the discussion here on this thread.  It would be interesting if you could share here the response you get, as and when you get one.

My first impression was that the piece was slightly under-researched and knocked out quickly, but the general thrust of it was correct.  On the lack of research side, it seemed to miss for example the important fact that Kiva was in at the start of mftransparency.org whose director Chuck Waterfield the article quotes, endorsing and committing to transparency in the display of interest rates and other terms.  It also entirely missed any reference at all to the rather relevant $250 million IPO of SKS Microfinance, an Indian MFI.   You can read about the Indian MFI's IPO here:
http://www.reuters.com/article/idUSTRE63814G20100409

I believe that Kiva is sincere in wanting to be transparent around the issue of interest rates, and (one can almost hear Premal saying it) making Kiva even more of a data-rich platform than it is already, but the execution can sometimes be a little shaky, to say the least. 

cheers

Peter

[wthepoo]

Hi Steve,

here's another thread you might want to read: http://www.kivafriends.org/index.php/topic,3403.0.html

It deals with LAPO and their interest rates / savings policy in particular towards the end.

Just briefly, I think when looking at microfinance interest rates, we have to consider a number of things (none of which, as far as I could see from scanning it, were mentioned or at least elaborated in the - quite tendentious - NYT article):

(1) short terms and low amounts of microloans => (esp. fixed) costs hugely increase APR
(2) fixed and running costs are particularly high with microloans (counseling, training, oversight, regular collection of payments, sometimes at the borrowers' places, travel, other services like insurance, clinics, etc.)
(3) in some borrower countries the currency is very volatile and inland inflation is high so that interest rates have to reflect this as well (and - with inflation - at no or little extra cost to the borrowers)
(4) MFIs often (though by far not all) are small(ish) organisations that are not exactly streamlined for efficiency and sometimes have to cope with antiquated technology etc.
(5) microloans in most cases will still be considerably cheaper than loans from other local sources like moneylenders
(6) many of Kiva's partners are non-profits and associated with international organisations that are not known for being exploitative - and these partners are still charging "high" interest rates (by our standards)... so there really must be a reason for this...
(7) it would be even worse than high interest rates, were the MFIs to collapse because their business wasn't viable
(8 ) at the end of the day, far more important than the interest rate is the profit margin of the entrepreneurs (as long as we are talking loans to entrepreneurs - which is also why I still don't generally support house building loans etc.) - Kiva once quoted a study by the World Bank reporting profit margins considerably higher than 100% so that even an entrepreneur paying 87% p.a. in interest would make a handsome profit from the loan
(9) obligatory savings / insurances also have their upsides (though I'm also sceptical of them, I have to admit) - they are not just making the loan more expensive but also have a training, a morale and a security aspect

All in all, yes, I'm still a bit wary of some of the higher interest rates and would want more accurate information regarding the actual interest rate, the MFI, their social mission, impact and own profit margin. But in general, I still trust that these interest rates are more or less necessary or at least adequate in most cases and do still allow for entrepreneurial microloans to be beneficial for the borrowers.

I agree that Kiva should vet their partners very thoroughly before accepting them and during the partnership. I'm sure that a lot is already done in that respect but there's probably still room for improvement. Also, I agree that Kiva should report actual interest rates (not necessarily for the individual loan but at least for a comparable loan product of the Field Partner) determined by Kiva staff on the basis of actual contracts and not a self reported figure (as it was until a while ago) or a calculated "average portfolio yield" based on published financial reports and merely approximating an average interest rate for the whole organisation.

I'm also looking forward to social ratings in addition to the risk ratings ("stars") that - if I recall correctly - are something Kiva is currently working on.

Best wishes,
Wolfgang.

EDIT: After re-reading your original post, Steve, I notice that I basically missed your point (sorry about that), but hope my thoughts might still at least be remotely interesting to other readers.

I would like to request that Kiva clarify and address the following concerns:

1) To explain in detail how Kiva chooses microlenders, how they determine if a microlender is charging exorbitant interest rates and how microlenders are audited;
2) Why the information on the microlender mentioned in the article was "stale" and how Kiva is going to ensure that interest rates reported on its site are accurate (and why 83% interest is not considered exorbitant);

I would also like to request that Kiva make it clear which microlenders are for-profit and which micro-lenders are non-profit. To my knowledge, this information is not provided on Kiva's site. In addition, I request that this be an available filter in the search options so that lenders can have more choice with regard to the microlending institutions they work with.

I fully agree and support your questions. And in fact, on May 21, 2009, I have first asked the KF Liaison to ask some similar questions (which she thankfully did though I found Kiva's answers lacking):

I would like to know:
* how Kiva makes sure that their partners are and remain organizations committed to "alleviating poverty or reducing vulnerability" (slightly rephrased from http://www.kiva.org/about/pic, where a history of this is set as a minimum criterion to become a Field Partner), this is not to discuss US-loans at all - whether you regard the US borrowers poor/vulnerable or not -, but the charitable/community-oriented mission of the Field Partners
* whether there are plans to publish more information on the particular Field Partners anytime soon - like "non-profit status", "profit margin", "administrative overhead", ...,
* whether they accept streetcred's posts - which among other alleged facts - state that a "normal" LAPO loan charges a Kiva borrower 74% p.a. effective interest - in contrast to the 24% p.a. stated on LAPO's Field Partner page,
* if so, whether they still think that LAPO loans are - in the majority of cases - in the best interest of the borrowers.

That's Kiva's response in late July 2009:

(1)  For monitoring, Kiva is working on incorporating social performance indicators into the field partner pages, in a way similar to the star ratings.  There are two new fields already on the field partner pages, indicating whether they've won any awards for performance from MIX Market.
(2)  They do not plan to publish status indicators as listed above ("profit margin", "admin overhead", ...) but instead refer us to MIX Market to review those, it would be duplicating effort to copy them to the Kiva website.
(3)  Regarding LAPO, Kiva stands behind this partnership, and verifies LAPO to be the most socially-oriented MFI in Nigeria.  They invest their profits in further growth to help more borrowers, and are looking carefully at their interest rates in a way that will help their borrowers while still staying sustainable.

[sgsilver]

Peter and Wolfgang, thanks very much for the information and for your input. This is very helpful. I did take Peter's suggestion and contacted Kiva directly with my questions. Wolfgang, thank you for the very thorough description and for sharing Kiva's response to your questions. I too found their answers to be lacking. I don't think that users should have to search through information on a separate site to find out the profit margins and administrative overhead of a particular microlending organization -- that should be basic information that is listed on the basic profile of the microlender. The social ratings concept is interesting and I'm glad that they are in the process of putting that in place. However, I still would like to see a "for-profit/non-profit" option in the search menu, or at least show this information clearly on the microlender profile along with the profit margin.

What this really comes down to is giving users as much information as possible in a clear, accurate, easily accessible manner so that users can make informed choices about the microlenders they decide to work with -- after all, it is not only the entrepreneurs who we are supporting, but the microlenders themselves.

Thanks again for your thoughtful comments. Once I receive a reply from Kiva I will post it here.

Steve

[PetraH]

I wanted to say I'm following this discussion.

Also, I do support housing loans, or loans that are not meant to improve a business. I feel that loans, also then, can be a way to increase quality of life and that it's worth it. The loaner could perhaps also save the money first and THEN make the house extension; but when these extensions are urgent or will improve housing conditions very much, then being able to fund them one year earlier could mean one year more of "happiness".

We people from Europe and the US have abused loans to buy things we didn't need... But I'm pretty sure that these loaners are not like us and will really consider what they do...

[wthepoo]

I feel that loans, also then, can be a way to increase quality of life and that it's worth it. The loaner could perhaps also save the money first and THEN make the house extension; but when these extensions are urgent or will improve housing conditions very much, then being able to fund them one year earlier could mean one year more of "happiness".

Petra,
thank you - just for clarification purposes: I fully agree with that statement, and I'm not opposed to housing loans (and similar personal use loans) as such for this very reason. I just believe that they involve different risks - not only for the lenders but also and in particular for the borrowers - and that here, the considerable interest rates of microloans have to come out of the pockets of the borrowers and cannot be "simply" covered using the extra profit made by the use of the loan funds. With loans to entrepreneurs, as long as their profit margin is above the interest rate (which should normally be the case), the loan will be beneficial to them regardless of the actual interest rate and whether it is "high" or not (which is not to say that the interest rate is not important and that we shouldn't watch it). With housing loans (etc.), it's much more important to make sure that the interest rates are adequate and rather low.

Best wishes,
Wolfgang.