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

[Guest]

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[Sherri]

I just noticed all that info on the MFI pages. Wow- handy! I'll be looking closely at that from now on.

But lets all remember- any lender has to charge an interest rate which covers them for all the customers who default on their loans. So, for example in a developed country for a lender who only lends to people with great credit, they can charge low interest. But if you go to a poorer country, I bet the number of people who can't or don't pay back loans is very high. So the lender must charge high interest rates to cover for that.  Much like how insurance rates work.

I'm not sure how this works though considering it's OUR money they are fronting here and so the risk to them when someone defaults is really only the administration costs.

[AccountAbility]

Sherri, there is another whole thread on interest rates which discusses this very issue.  Since the cost of money is a small portion of what a lender must charge in interest, the MFI loses quite a bit in a default.  But the defaults are remarkably low.

Dan

[jimroletter]

I am new to Kiva and I can't say that I share your indignation with the process.
I can think of a few reasons you shouldn't be so concerned about this.

First consider that based on the market situations in this countries, there may not be other lenders that want to enter this market for less than 50% interest rate.   I've recently returned from Turkey and they're annual inflation is such that home mortgages have never exitsted until only recently and now they are 5 year term and upwards of 20%.   So we can't impose our own social norms on other economies without considering the realities.  Also consider that these people borrowing the money are capitalist minded in their endeavors.   One guy in Azerbaijan that sells clothes may be borrowing $800 to buy clothes that he will then sell for $2000 so his mark up to the end consumer will be higher than 50%.

Secondly, consider that everyone is motivated for some self-serving reason.   We may not lend $25 at a 50% interest rate but surely we are deriving some sort of satisfaction in helping someone.   So what is more selfish?  Lending someone $100 and asking for $150 back or lending someone $100 and getting invaluable amounts of self back patting in return?

Your position reminds me of the many situations in which, we as Americas impose our standards on others to their detriment.   For example, the closing of a factory in southeastern china because NBC Dateline ran a story that Nike was having 14 year old girls work 10 hour days, 7 days a week and only paying them $1/hr.   We don't take into consideration it may have been the best paying job available to these people and now that we feel good about ourselves for shutting the factory down.......the former young employees have moved to Thailand to work in the sex industry as their only alternative.

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.

[Laurie]

Jim, your post was thoughtful and thought-provoking.  Welcome to Kiva and Kiva Friends.  I hope we will see you here more frequently.

Safe travels,
Laurie
Writing tonight from Chimicum, Washington, USA

[farwest]

Gumby, Kiva obviously isn't a scam.  But I do share the concern about some of the obscene interest rates being charged by some of the MFIs.  However, rather than Kiva simply ignoring or hiding the interest rates (not placing the various interest rates on the Lending Pages IS a scam imo), they should CLEARLY explain why some MFIs need to charge such high rates.

I'd also like Kiva to allow lenders the option to buy down the interest rates to reduce the interest burden on the borrowers.  Think of it as the reverse of buying down a loan's interest rate by paying fees upfront (as in a typical mortgage).  That way, Kiva lenders are introduced to the hard reality of lending to impoverished third world people.  Right now, us rich westerners do nothing other than give up a bit of interest (at very low rates) and force those who can least afford it to pay high, to obscenely high, interest rates.  It's unconscionable that the impoverished are paying more than 10% interest.

I'd like to see an option of receiving a partial return on a loan (let people pick what ever amount they want - say 70% return to offset a 30% interest rate).  Obviously, I think every borrower should be forced to pay interest (much like everyone should have copays when going to the doctor), but being forced to pay ~50% interest is nothing less than loan sharking, no matter what face Kiva or the MFIs want to put on it.

I'd also like to see Kiva start to increase the size of the loans being offered.  Keeping loans small dramatically increases the administration costs.  Why limit people to $1,200? I suspect bigger loans may actually be more beneficial in the long run as those borrowers will likely hire those who have no desire to start a business and be responsible for repaying a loan.   I suspect there are vastly more people who are afraid or are uninterested in a loan and would simply like a regular paycheck.

[Henry]

well, to be honest....what I get in return for my $25.00 is....well, I thought to get to KIVA FRiends you had to have loans!   

never give up- never settle!  If my thought process with KIVA working with MFI's to reduce interest by even 1% then that makes KIVA stronger!

[Ramón]

Hey all,

First of all, welcome to all new Kivans here on Kivafriends. Some of here remember the last time Kiva ran out of loans-- I think it was after a CNN episode back in February.

Couple of items here. First of all, those that get disillusioned by Kiva's growth- please don't! With the growth of lenders, Kiva's influence over MFIs will grow and they will be able to drive some of their sustainable development ideas a little harder.

Second, Kiva is as much a help to the individual lender as to the MFI. Creating financially sound and self-sustaining MFIs is important to provide financial services to the underserved; and I think ideally, such an MFI should be able to grow to the point that they don't need any external money to provide these services to the poor. Many MFIs indeed organize borrower group meeting, business seminars, etc.

I also think that some for-profit MFIs like Prisma ultimately will be more efficient, and therefore more successful in reaching the underserved than NFPs. There is a caveat-- this only works as long there is a strong social-entrepreneurial aspect to the MFI, which means that the goal of making profits is not just to make some anonymous shareholders rich, but to grow the economy as a whole.

There are good (Prisma) and bad (Compartamos) examples out there.

BTW, for those that have some time and want to get an intimate understanding of how an MFI works and interacts with Kiva, many of Dr. Kendall Mau's postings on his blog are extremely interesting/relevant. You can find a link in the drop down list on the top-right of the page.

Welcome again to all!

--Ramón