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

[Guest]

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[gumby]

Hello,

  I have been a Kiva member for about 1 year now, and I have been a little skeptical about this process. I was under the impression we either ALL make money from the process, or NONE of the parties involved profit. I lent out 150 dollars, and when the loan is paid, I will get 150 back. Which is fine to me. The part that bugs me, is that the lending institution actually moving the money to the lendee, is charging interest.  Again, I came to terms with this, but I was under the impression that the interest was a trivial amount.

 When I looked up the people I donated to, I noticed a new tag with information about the lender that moved my money. I checked them out, and it says they are charging over 50% interest!!!!!!! WTF? So this leads me to understand all I have done is to bankroll someone else's funds to start a loan. It's like me giving Citibank money to loan someone, and they make a buttload of money on the deal, and I get nothing but a hearty "Thanks"  This is unacceptable. I love what kiva is doing, but hopefully they can find a way around this cleverly disguised money machine  that's being run in their name.

  This is my issue. I love and I mean LOVE helping people in third world countries, but this system is making me think I won't re-lend my money. If there is a bank making that kind of money on the loan, why don't they just lend the money themselves? Where is the altruism from these institutions? I hope someone can explain this in a way that can ease my cynical mind, because this just looks like another way to get extremely kind and giving people to become part of the machine they despise.

  This news sickens me. I hope I just don't understand the process, and someone can explain it to me. It seems a better way would have been to give a percent back that can be re-rolled into this process so it would snowball into great things as time went by.

  Why don't I just open a lending institution in a third world country so I can get Kiva to give me the money to lend so I can get fat and rich, without having to raise any money myself?

  Thank you for reading this, I really had to get this off my chest.

   Peace,
 Gumby

[Henry]

Hey Gumby, Pokey here.... 

"is kiva a scam?"   well, I Think RichardF has the best answer for you and hope he does take the time to discuss this question. 

I've been shocked of recent with the HIGH INTEREST RATES as well.   KIVA has a lot of money to offer to MFI's, I wish they would show their backbone and 'mandate' instead of continue to focus on growth. This also goes along with KIVA needs to focus on 'in house' issues instead of growth (such as accuracy on their website, monitoring MFI's better, etc.) 
edit(actually they could be doing just this, but i'm not aware of any interest mandates or strong push to MFI's)
Let's hope KIVA does before some of us give up - and word get's out why.  In the meantime, we can hunt for the lower interest rate MFI's to do business with.

[simba]

No I don't think Kiva is a scam.

But some of their MFIs or the people they serve could be scams.

As far as interest rates, it varies by the region.  Folks let us face it, it cost lot more to service unbankable people in countries without strong banking system.  Many of the MFIs use internal funds, money from charities or now zero cost capital from Kiva etc (actually if you look at their loan volume, Kiva funding is minimal).  Now a days low cost or free money comes with a string - that the organization has to become self sufficient in some period of time.  The only way MFI could become self sufficient is to grow  - for growth they need income.  Their income comes from charging interest on the loans.  If the MFIs are growing they must be doing something right.

[Henry]

Simba, we aren't too far off on this, my issue isn't really with the amount of interest charged, ( I like to compare amount charged with 'average local lender rate' and make a choice from that difference)

My issue is with inconsistency's on the KIVA.org site. 

As for the amount of interest charged, since our money is free money to an MFI, well, not actually free, but almost free, it would be nice if KIVA imposed a no more than 1/2 local lender rate may be charged.  How many MFI's would leave us?  who cares!  so we(KIVA) isn't as big.  Many times, great things come in small packages!

Dan and RichardF and others have educated me (as much as I can be) on the cost of doing business as an MFI. 

[RichardF]

Hi Gumby, et al.! 

I'm certainly not the expert here, but I can relate to your feelings.  For me, the bottom line is that the business of microfinance is expensive!  The "system" takes a lot to operate...and it always will.  I don't see this as a "scam," but just the way it is.  Kiva "knows" Westerners will have this sort of averse reaction to the costs of microlending when they start to "get it," so they have a tendency to "muddy the waters" bit.  That's the part I don't like.  While I don't see this as scammy, I do see it as the elephant in the living room they don't want to talk about that much. 

There's lots of stuff out there on the subject.  Maybe a good place to start looking for more on this issue would be the Mocrofinancing Board.

[Dottie b]

Yeah, making unsecured loans is expensive, but these loans are different, inasmuch as if the borrower defaults, the MFI doesn't have to repay the lender! So it doesn't matter that the loan is unsecured! The MFI has nothing at stake, yet reaps all the profits! Just because the rate is less than usurious loans by other lenders doesn't make it okay.

[Jill]

Dottie--
     I agree with you.  NOTHING makes it okay.
   The problem is.....

    if these particular MFIs are "the best game in town," sometimes, "the ONLY game in town,"
    if their rates are less than anybody else's in that geographical location,
    if their other business practices and track record can pass Kiva's muster,
    if without hooking up with these MFIs,
    Kiva would not be lending in those (sometimes giant) geographical locales,
    and the people there, otherwise, would have either no opportunity
    or even more expensive "opportunities" (sic)
    to have access to capital,
    and with that heretofore unavailable access to capital, are now able
    to have a chance to get a business off the ground
    and maybe thereby
    better be able to provide for themselves and their families,
    what's the answer?

    I don't know, myself.  I hate the (to us) exorbitant and seemingly unscrupulous rates.
Yet, I still want the people in those areas to have some kind of a chance,
even if, in this kind of situation,
it's so much less than I wish it were.

[Robert]

If banking with the poors made the bankers "rich and fat", the big established banks would have been in this market for a long time. The decision makers in these banks have all the information, intelligence and capital needed, and they stay out. Isn't that enough proof that the business isn't yet profitable?

[RichardF]

Bingo! 

[simba]

many credit cards in this country charge 30% interest. Have you tried to borrow money from cash advance places?

Beside for near future Kiva is in no position to dictate terms to MFIs - funding from Kiva (or us) is very small part of any individual MFIs pool of money.