How is Kiva's repayment rate defined?

[Guest]

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[JKurnia]

Dear Kiva Friends,

I work with a new nonprofit peer-to-peer lending platform, Zidisha.org, and we're currently designing a more detailed statistics page for our website.  We'd like to present our data in a way that is consistent as possible with other microloan fundraising platforms, and so we are trying to understand the precise calculation behind the repayment rate displayed on Kiva's homepage. 

The repayment rate seems to be the inverse of Kiva's default rate, which is defined on Kiva's site as follows:

Default Rate:
Percentage of Ended Loans (no longer paying back) which have failed to repay (measured in dollar volume, not units).

How this is calculated:  Amount of Ended Loans Defaulted / Amount of Ended Loans

Notes:
Many Field Partners do not yet have many Ended Loans due to their short history on Kiva (see "Time on Kiva"). A more meaningful indicator of principal risk is "Delinquency Rate".
For loans that are delinquent at the end of a loan term, Kiva allows the Field Partner 6 additional months to attempt collections before deeming the loan as Defaulted.

This definition would seem to calculate the default rate numerator as the volume of loans that were not repaid as of six months after their last installment due date.  Since the denominator includes all ended loans, it presumably includes loans that ended less than six months ago.

I'm confused because defining the repayment rate as the inverse of this calculation would count loans that ended less than six months ago and have not yet been repaid as part of the numerator.  In other words, a loan that came fully due five months ago and has not been repaid would be considered to be part of the pool of repaid loans in the calculation of the repayment rate.  This would be an inaccurate way to calculate the repayment rate, so perhaps I've misunderstood the definition that is being used. 

One way of avoiding a misleading repayment rate calculation would be to define the default rate as the volume not repaid six months after the final payment is due, divided by the volume of loans whose final payment was due six months ago or more.  However it seems from the definition posted on Kiva's website that the default rate denominator includes all ended loans, including those that expired less than six months ago.  Is this in fact how the default rate and repayment rate are being calculated?

Any help in understanding these definitions would be much appreciated.

Thanks,

Julia Kurnia

Director
Zidisha.org

[Amy-in-PHX]

Dear Kiva Friends,

I work with a new nonprofit peer-to-peer lending platform, Zidisha.org, and we're currently designing a more detailed statistics page for our website.  We'd like to present our data in a way that is consistent as possible with other microloan fundraising platforms, and so we are trying to understand the precise calculation behind the repayment rate displayed on Kiva's homepage. 

The repayment rate seems to be the inverse of Kiva's default rate, which is defined on Kiva's site as follows:

Default Rate:
Percentage of Ended Loans (no longer paying back) which have failed to repay (measured in dollar volume, not units).

How this is calculated:  Amount of Ended Loans Defaulted / Amount of Ended Loans

Notes:
Many Field Partners do not yet have many Ended Loans due to their short history on Kiva (see "Time on Kiva"). A more meaningful indicator of principal risk is "Delinquency Rate".
For loans that are delinquent at the end of a loan term, Kiva allows the Field Partner 6 additional months to attempt collections before deeming the loan as Defaulted.

This definition would seem to calculate the default rate numerator as the volume of loans that were not repaid as of six months after their last installment due date.  Since the denominator includes all ended loans, it presumably includes loans that ended less than six months ago.

I'm confused because defining the repayment rate as the inverse of this calculation would count loans that ended less than six months ago and have not yet been repaid as part of the numerator.  In other words, a loan that came fully due five months ago and has not been repaid would be considered to be part of the pool of repaid loans in the calculation of the repayment rate.  This would be an inaccurate way to calculate the repayment rate, so perhaps I've misunderstood the definition that is being used. 

One way of avoiding a misleading repayment rate calculation would be to define the default rate as the volume not repaid six months after the final payment is due, divided by the volume of loans whose final payment was due six months ago or more.  However it seems from the definition posted on Kiva's website that the default rate denominator includes all ended loans, including those that expired less than six months ago.  Is this in fact how the default rate and repayment rate are being calculated?

Any help in understanding these definitions would be much appreciated.

Thanks,

Julia Kurnia

Director
Zidisha.org

I am reading through a week's worth of "All Recent Posts" today, after being away from the forum for several days.  The question quoted above was posted 6 days ago, and I think Julia raises a good question.  I was surprised to see no responses.  Did someone send her a PM?  I would be interested in knowing the answer, so I hope someone will feel like responding.   

If the numerator of Kiva's "default rate" includes loans for which the final repayment was due at least six months ago (which is Kiva's definition of a default), while the denominator includes ALL ended loans, including loans that ended less than six months ago -- Wouldn't that tend to overstate the value of the denominator, and therefore understate the "default rate" as reported on Kiva?

[JohnAtKiva]

Hello Julia -

My understanding is that the Kiva default calculation takes a look at all the loans that have ended, including:

* Loans where the borrower has successfully completed making repayments, and
* Loans where the loan has been declared as defaulted, because it is six months or more behind in repayments

We then look at the total dollar amount of these completed loans and say: out of the total dollar value of the loans that have been completed, how percentage of those dollars were not paid back?  We calculate that percentage as our default rate.

I wasn't sure how the six months part fits into the denominator - could you give an example of what you had in mind?  I'll do my best to look into it.

Best,
John

[Amy-in-PHX]

If the total dollar value of all loans made on Kiva, that have reached their ending dates, is $1,000.
And if the loans that have ended more than six months ago (which are the only loans that can be said to have "ended in default") still have funds past due of $20.
Kiva would say "Our default rate on Kiva is only 2%," or, inversely, "Our successful repayment rate on Kiva is 98%."


BUT, if you counted only loans that had reached their ending dates more than six months ago in your denominator, that number would be less than $1,000.  Let's say it is $900.  The  loans that have ended in default would still have funds past due of $20.  Then Kiva would have to state a default rate that is somewhat higher than 2% ($20 divided by $900 = 2.22%), and a successful repayment rate that is somewhat lower than 98% ($880 divided by $900 = 97.78%). 

I suspect that Kiva is big enough now, that the difference will be small, and with rounding may disappear.  But it is important to have Kiva's financial terms stated accurately, IMO.  And there may come a time when defaults get bigger.  And for Julia and Zidisha, since Zidisha is small and just starting out, the difference in the two percentages may be significant.

If your numerator includes only loans whose terms ended more than six months ago (by definition), but your denominator includes ALL loans whose terms have ended, you are not comparing apples to apples.

[JohnAtKiva]

My first thought is, would these potential future defaults be captured in the delinquency rate of that partner?   The default rate is usually displayed alongside the delinquency rate, and together paint the full picture...

That said, I will loop back with the internal experts on this one.

Best,
John

[Amy-in-PHX]

I reiterate:  If your numerator includes only loans whose terms ended more than six months ago (by definition), but your denominator includes ALL loans whose terms have ended, you are not comparing apples to apples.  And I add:  if that is how you have calculated your "default percentage," it seems to me, the default percentage is not meaningful, and is understated.

Delinqencies are also an important figure, but a separate one from defaults (even though all defaults were once delinquencies).  (IMO - Maybe Dan or Ronan will set me straight.)

[JohnAtKiva]

Hello Amy - Thanks, I definitely understood your point about apples-to-apples.  No need to reiterate. :-)

I will check in with the internal experts on this and report back.

John

[YowieFreak]

... If your numerator includes only loans whose terms ended more than six months ago (by definition) ...

Unfortunately (because it makes any true calculation very complicated) the numerator also includes loans which have defaulted where the terms did not end more than six months ago - e.g. ones where Kiva has been advised by the Field Partner that no further repayments will be received despite the fact that the term has not yet expired plus ones where, although the last payment is not yet overdue (and possibly not even due yet at all), it is over 6 months since any payment was overdue.

Kiva definition (emphasis added by me): "At Kiva, we define default (non-repayment) as: the time when Kiva determines that collection of funds from a borrower or Field Partner is doubtful and 180 days past the originally schedule repayment date (for any expected repayment, not just at the term of the loan)."  (I think the "and" between "doubtful" and "180 days" should really be an "or", because I have seen loans being defaulted well before they had a repayment that was 180 days overdue.)

Because of this definition, only including loans that are more than 6 months beyond the due date of the final repayment when determining the denominator will overstate the actual default rate, just as the current calculation understates the actual rate.  (But, because any loan could theoretically default tomorrow by Kiva's stated definition, I think the current calculation is probably closer to "reality".)

[Amy-in-PHX]

Kiva definition (emphasis added by me): "At Kiva, we define default (non-repayment) as: the time when Kiva determines that collection of funds from a borrower or Field Partner is doubtful and 180 days past the originally schedule repayment date (for any expected repayment, not just at the term of the loan)."  (I think the "and" between "doubtful" and "180 days" should really be an "or", because I have seen loans being defaulted well before they had a repayment that was 180 days overdue.)

Oh, Thank you for the clarification, Ian.  Yes, I think you are right that in practice, Kiva is treating the "and" as an "or," if they declare defaults sometimes before 180 days have passed since a payment is due.  So when Kiva says "Default rate = Amount of Ended Loans Defaulted / Amount of Ended Loans," the numerator can have any loan in it, which Kiva has declared "defaulted," regardless of the payment schedule.  When Kiva declares "default," the "end" has arrived, so to speak.

If the word "ended" means something different in the numerator from what it means in the denominator, I'm still not sure it's mathematically valid to create a "percentage" out of the two values.  But it does sound like Kiva may be providing conservative guidance regarding default experiences, because they do not wait for the scheduled payment dates to arrive in cases where it is not reasonable to expect payments to be made.  That practice would tend to make the numerator bigger than if they waited for the original maturity date of the loans. 

Julia, if you are still following, I hope the discussion has been helpful.  I'm not sure I fully understand Kiva's default "percentages" myself, now, but I am more comfortable that Kiva's guidance is not likely to understate default experience.  Maybe John will be able to shed additional light, later.

[JKurnia]

Dear Amy-in-PHX and others,

Yes, this discussion has been helpful and I much appreciate all of you taking the time to participate.  Clearly any method for calculating default and repayment rates has advantages and disadvantages.  Portfolio quality is usually captured most accurately using loan loss reserve rates - an estimated percentage of a microfinance operation's outstanding principal that is expected to be lost to default, calculated based on how much of the portfolio is late on its repayments and by how much.  However the LLR is likely too complicated to present as a headline figure on an organization's homepage, and we will probably opt to present a repayment rate whose numerator and denominator are drawn from the same pool of data (loans that have ended six months ago or more), while offering additional statistics including delinquency rates in a link below the repayment rate displayed on our homepage.

Thanks again and regards,

Julia