Is kiva ultimately a scam? I hope someone can explain this...

[Guest]

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[AccountAbility]

Gee, Simba, you were doing great -- until you got into 30% interest credit cards. 

Please let's not put them in the same boat (maybe not even in the same thread) with MFIs who are hovering around self sufficiency, some below that level some above (but not by a lot).

Dan

[AccountAbility]

I want to reiterate two things.. one is that I don't think KIVA is a scam. I made sure to write that in a few places....
It's too bad that Kiva couldn't close the greed loop. maybe in time and with more people. ...But it sickens me to think that people may use the kindness of others to scam the less powerful or the needy that are trying to get a leg up.

...I am saying I dread it being a "scam by proxy" because of some of the extremely high interest rates. It was the one thing I couldn't get any clues about when I signed up, and lo and behold when they are now posting the details about the lenders.. and BAM just the thing I was dreading. But in Kiva's defense. The fact that they are now posting that information makes me happy. Now I can choose my lenders more carefully. I just hope that was voluntary, and not a mandate from the government. (as part of the truth in lending laws, or something)

  Thanks again for debating this. I want to really peel the lid back on the deeper parts of this deal.

  Peace,
  Gumby

Regretfully, you keep equating high interest rates with "scam".  One is an economic issue which can be analyzed with math and understanding the business of micro-lending.  The other is an ethical or moral evaluation, going to the motive of the persons involved.  Before you reach that conclusion you will have to find out a lot more about who these field partners are and what motivates them.  They undoubtedly are not all uniformly altruistic, but their level of altruism and pure motive does not equate to the interest rate they charge.  If nothing else, let's keep these separate.

Dan

[gumby]

I'm sorry, but 50-100 percent interest is not good business. No one can convince me that people struggling to make a few bucks think paying that much interest is a good thing. Especially if this is a third world country. Their costs should be decidedly lower as the amounts they are lending are lower. Especially when someone else supplied the money to lend. Can someone on this forum honestly say to me that they are comfortable with someone charging 50 100 percent interest? In this country that number would be far and above any agreement that would be legal and that includes the interest rates given to people with horrible credit, people that have filed bankruptcy, etc. Think about that. In this country you'd go to jail for that.

  no one can convince me that those kinds of rates are anything other than greed. But I welcome the person that can convince me of it.

  Imagine if the money you lent in good faith wound up breaking a person to the point of absolute poverty and destitution because they couldn't afford the interest. what would be the sense of that? That somehow a lack of checks and balances on that side could completely corrupt the most wonderful of intentions. I love Kiva, and I hope we as a group find a way to combat that.

  Nuff said..

  Gumby

[KivanSteven]

Maybe these MFI's dont want to lend to at risk individuals and thats where Kiva lenders come in.  They wont risk their money but theyll risk ours without hesitation.  Sure its unfair that these MFI's profit from all 10 million of our contributed funds but so long as Kiva's repayment rate is near perfect the real issue of assisting those in need is being satisfied.  MFIs that profit are a secondary and notable issue, but its not enough to stop me from contirbuting to this endeavor because if these MFI's wont take the risk then its people like us who are willing to.  Hopefully a good intentioned org like Kiva can become successful enough to eventually dictate the MFIs they work with based on the interest %s they charge the recipients, but ultimately that cannot occur now, but only with Kivas growing and continued support.  There is no way Kiva or anyone else can suddenly come in and take control of the entire process automatically.  Usually you have to work with things the way they are, get your foot in the door, gain some recognition and influence and in time a repuotable org can break down the doors and eradicate what is unfair and unjust concerning these loans.  Overall though I think even with the status quo the positives far outweigh the negatives.

[RichardF]

Gumby, your subtlety eluded me.  My apologies if you were offended by my words. 

I don't recall the last time anyone called me "naive" ( no one here has), and I have to say I don't see the "scam factor" in the microfinance industry as far as "high interest rates" go.  A criticism of Kiva I've been making lately is just about 180 degrees from what you have been saying. 

In effect, Kiva's MFI's reported interest rates often underrepresent the "effective" cost of a micro loan.  A Wikipedian microfinance buddy of mine who has worked with MFIs, Brett epic, shared his criticisms of Kiva's MFI interest rates reporting approach much more strongly here and here.

Two quick links to some of my comments about this at Kiva Friends are here and here.

[gumby]

One other thing. I don't think of the people asking for loans on Kiva to be "High Risk" people. they are just small fish. The types that don't normally get the time of day from financial institutions. I think the low loan default rate shows how not risky most of the people really are. I salute everyone trying to make it against the odds.

  I won't stop lending either. I want to open the forum up to ideas about this subject.

  why couldn't startup MFI's be offered through Kiva, in exchange for checks and balances on issues like these? Loans to loaners we could call it.

  I'd give more money for that.

  Gumby

[KivanSteven]

True, I didnt mean high risk as implying bad or negligent people, but relatively speaking they are considered high risk because most lack any credit.  Same thing in this country...we can get credit pretty much anywhere but it doesnt mean we arent considered high risk as well if we have no prior credit history.  I just wanted to clear up that it wasnt my personal opinion that these entrepreneurs were high risk.  The Kiva repayment rate has proven they are not.

[AccountAbility]

I'm sorry, but 50-100 percent interest is not good business. No one can convince me that people struggling to make a few bucks think paying that much interest is a good thing. Especially if this is a third world country. Their costs should be decidedly lower as the amounts they are lending are lower...
  no one can convince me that those kinds of rates are anything other than greed. But I welcome the person that can convince me of it...

  Nuff said..

  Gumby

Gumby, I am beginning to wonder whether you really want an answer.  "Their costs should be decidedly lower as the amounts they are lending are lower." 

Only money costs float with the loan size.  Almost all the rest of the costs are inversely proportionate to the loan amount. 

The cost to process a loan does not go down as the loan gets smaller. 

The cost to set up and disburse a loan does not go down as the term gets shorter. 

And inefficient markets and poor infrastructures do not make costs of collection or monitoring go down.

None of the above has anything to do with "greed".  In fact, many in these MFIs are there for the most altruistic reasons, with extremely high ethical and moral standards.

Dan

[Dottie b]

I suspect there's more going on here than I'm aware of. It can't all be greed or inefficiency! I'd like to hear Kendall talk about the factors that go into the 58 percent interest rate Prisma charges and what, if anything, they're doing to lower it. I think it would be enlightening! He certainly doesn't strike me as a scammer!

(I just started that free UN course on microfinancing. Maybe by the time I finish, I'll have an idea why rates are so high. I didn read the part on Basic Concepts, and it appears that ideally, an MFI generates enough revenue to sustain itself financially, including weathering inflation. Only a few percent do.)

http://www.uncdf.org/mfdl/index.php?_mode=students.home

[gumby]

Richard, those were excellent links! Those are the nuts and bolts of the issue I am talking about.

  What bothers me is how some try to turn the idea around by citing things like averages of the region. just because a region's lending institutions typically are able to get X amount of interest doesn't mean that it's an honest shake. If it was legal in America to charge 1000 percent interest, I'm sure you'd see it. That doesn't mean it was necessary or in good business ethics. I did notice that the average rate overall was something like 18 percent (flat rate) which equals something like 30-36 percent. That sounds pretty good overall. Not great, but realistic.

  Let's keep it simple by asking yourself " Would I pay 50-100 percent interest?" I doubt it. Unless you had no other choice.

  Man, I'm glad I brought this up. I love to see what people's passions are on this subject...

  Bravo to everyone with a legitimate opinion! This is great communication. Viva Kiva!

  Peace,
  Gumby