News & CommentaryArchive
Oct 12, 2009
Even More Questions About Kiva
See A Mostly Comprehensive Guide to the Kiva and Donor Illusions Debate for links to the debate on this topic from around the web.
Update: See the bottom of the post
David Roodman of the Center for Global Development recently wrote a brilliant post on how Kiva, the “person-to-person” microlending site, is not exactly what it seems. The quick version: while it appears that Kiva lenders are choosing who they loan to, in reality the loans to the borrowers on Kiva’s site have already been given. Roodman rightly points out that Kiva operates the way it should it if wants to be maximally helpful to both borrowers and MFIs. The problem is the subtle misleading of Kiva’s users.
In Kiva’s defense, this subtle misleading is not unique to Kiva; most NGO’s operate this way especially in disaster relief, child sponsorship, and alternative gifts (like giving a cow or a goat). The reason it’s so prevalent is that the donors demand it—and they vote with their dollars if the NGO is unwilling to provide the illusion of a person-to-person connection. Kudos to Roodman for exposing the illusion in a comprehensive and thoughtful way. While I think trafficking in such illusions is wrong, I understand why they are perpetrated in the name of the “greater good.“ I wish Kiva and others would abandon this practice, but I also acknowledge that they can’t until donors stop requiring NGOs to mislead them.
But today I saw a Kiva document that, for me, points to a far bigger problem. Roodman shared a document Kiva uses to explain its operations to MFIs. Two points in the document floored me. First, all losses from Kiva-securitized loans are borne by the Kiva user. Second, Kiva’s monthly repayment reports are not based on actual repayment data.
The first is a problem because of fungibility. MFIs have no liability for delinquent loans underwritten by Kiva users, while they often are liable for capital from other sources. I’m sure I’m not the only one who immediately saw that this encourages MFIs to book delinquent loans to Kiva rather than to other capital providers. It seems to me we have pretty recent experience with what can happen when you separate liability from lenders.
The second, in my mind, isn’t subtle misleading of users—it’s just plain misleading. Essentially, Kiva is not receiving reports from the MFIs on whether specific loans are being repaid. Kiva is reporting repayment to its users based on the assumption that the loan is being repaid—and Kiva will assume that the loan is repaid until the MFI decides to notify Kiva otherwise. For anyone who has been inside the books of an MFI this should be really disturbing. No two MFI’s define default the same way and often default is up to the discretion of a particular loan officer. Combined with the zero-liability noted above, these are accounting loopholes big enough to drive an entire fleet of trucks through.
In the big picture, this is just another illustration of the dangers of the illusion model of person-to-person connection in charitable giving. Like little white lies there is often a perfectly plausible, even good, reason for creating the illusion. And like little white lies, the illusion has to keep growing to continue to be credible. And as the illusion becomes all encompassing you open the door to deception, corruption and fraud. That’s what happened with child sponsorship back in the ‘90’s. Is that what will happen to person-to-person microfinance in the ‘10’s?
Update: Thanks to David Roodman for his comment below, helping clarify two things: one, I’m not suggesting that lenders are currently booking loses to Kiva; two, there’s already some evidence that MFIs are shifting losses around to benefit Kiva lenders, so this is not just a theoretical discussion.
But that led me to thinking more about how Kiva is handling repayments. The linked document says that MFIs don’t necessarily repay Kiva. Kiva deducts repayments from the next loan to the MFI. What that means is that some new lenders money is not just not going to a specific borrower, it’s never leaving Kiva’s bank accounts. It’s being shifted from one Kiva user’s account to another. Now, because of the fungibility of money there’s technically nothing wrong with this. In fact, it’s a good thing because it minimizes overhead costs (such as wire fees and currency conversion). But it is different from the story and it seems pretty clear that many Kiva users would not be happy if they knew the reality of the situation.