More Kiva KibitzingOctober 6, 2009
By David Roodman Tags: Kiva
• Kiva Is Not Quite What It Seems is eliciting an extraordinary set of high-quality comments.
• On CGAP’s microfinance blog in April,
Deborah Burand imagined the worst for the person-to-person microcredit industry Kiva has spawned. What if charlatans debase the market with Ponzi schemes? How should the good guys differentiate themselves?
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The “on the one hand” and “on the other hand” of microfinance lending
by Deborah Burand: Monday, April 27, 2009
Two of my fellow law professors here at the University of Michigan Law School recently asked me what I thought of online lending platforms dedicated to microfinance. In response, I heard myself saying things like “on the one hand” yet “on the other hand.” I am sure I confused my colleagues more than I might have clarified matters. All of which is a long way to say I am ambivalent about these platforms.
On the one hand, I am in awe of the power of online lending platforms to generate interest in the microfinance sector among the general population and to attract capital to the microfinance sector, especially in these difficult times of tightening credit markets worldwide. I also admire the people I know who either have founded online lending platforms or now work for online lending platforms. So why the ambivalence?
Well, that is the “other hand.” Every time I read a newspaper story about Mr. Madoff’s financial chicanery, I wonder if somewhere, some time in the future, we also might see an online lending or investment platform characterized as a
Ponzi scheme. The nightmare headlines accompanying that story might go something like this… “Online Do-Gooders Cheated” or “Loans to Poor Rarely Delivered.”
"I am in awe of the power of online lending platforms to generate interest in the microfinance sector among the general population and to attract capital to the microfinance sector, especially in these difficult times of tightening credit markets worldwide."
Evidence to date is that today’s online lending and investment platforms are conscientiously working to fulfill the promises they make about where and how the funds they attract are delivered. But the number of these platforms is growing quickly, so it is not hard to imagine some less reputable actors entering the field in an attempt to get rich quick by appealing to the soft hearts of unsophisticated or ill-informed online lenders.
How might the good guys differentiate themselves from these potential bad guys? Here are a few ideas.
• There could be a transparency award for online lending platforms similar to that which we give to microfinance institutions.
• There could be a specialized code of conduct or best practices that all reputable online lending platforms could endorse (and be held accountable to).
• There could be a new cottage industry created (either conducted through or created separate from existing online lending platforms) aimed at educating the online lending community so that online lenders might make informed choices about which platforms they choose to use as the vehicle for their online loans.
• Online lending platforms could invite ratings by specialized microfinance rating agencies much like the ratings now aimed at microfinance institutions.
• Finally, and perhaps most powerful, the community of online lenders could self-police and share openly their “good” and their “bad” experiences with online lending platforms. Some microfinance stakeholders might even consider using “secret shoppers” to pose as online lenders and then openly compare experiences across platforms.
Some of these ideas already are being advanced by online lending platforms or the online community that invests in these platforms. Others are perhaps just the wild ideas of a worrywart (me!). The concern, of course, is that the need for clear differentiations among “best practice” online lending platforms and the “others” will become pressing only if and when a bad actor does surface. But by then the damage will have been done, and the overall credibility of online platforms in particular and the microfinance sector more generally may be irreparably damaged.
