Monday, April 11, 2011

Kiva

Kiva

Hey it’s Kiva time!

I’ve been contributing to this organization called Kiva for a couple of years now.  I mentioned Kiva in passing the other week when I was talking about the Whole Planet Foundation, and micro loans, and cheese.  But mostly I talked about the voices in my head, and Muhammad Yunus, and the Grameen Bank, who were the first to recognize and develop micro loans as a viable assistance strategy for development financing.

As it turns out, The Grameen Bank isn’t the only organization that is financing micro loans around the globe.  They were the first, but lots of other organizations have since gotten with the program and have started offering these types of loans, all over the world.  Even here in the United States, surprisingly enough.

About two years ago my friend Bill introduced me to Kiva.  This organization is a sort of micro loan clearinghouse of sorts.  But it is not exactly a charity, at least not to the people like me that fund it.  Kiva almost functions as a micro loan “re-loaner” to smaller organizations that actually distribute the loans.  So Kiva itself is a charitable organization, but people like me who give money to Kiva to finance micro loans are not actually giving our money away.  Confused?  I’ll use an example of a micro loan to demonstrate how it works:

Julia is a 29 year old widow with three children who lives in Kenya and owns a courier business, with one motorcycle.  She wants to expand her business by purchasing another motorcycle.  In order to do that she wants to take out a loan.  Fair enough.  She needs $850 to buy the motorcycle. 

Enter The Kenya Agency for the Development of Enterprise and Technology (KADET).  This organization was founded in 2000 with the express aim of providing financial services to rural Kenya.  Julia applies for a loan from KADET, but KADET needs financial backing for the loan, collateral, and between Julia and KADET there really isn’t enough money and security to make this loan possible.

This is where I step in.  I offer to take the risk on Julia’s behalf.  Essentially I provide the capital for the loan to KADET, and assume the risk if Julia does not pay back the loan.  Assuming Julia does pay back the loan, I get my money back.  I’ve never met Julia, I have no idea if she will pay back the loan, so it is a bit of a leap of faith on my part. 

Of course Julia doesn’t pay me back directly; she pays the money to KADET, who then pays me back.  Now remember that this is a LOAN, not a gift, or a grant.  That means KADET is charging Julia interest on the loan.  About 27% interest in this case, actually.  Remember in the other post I talked about the high interest rates on these loans, compared to what we might be used to in the States.  27% is not that bad for a micro loan, actually.  So Julia takes out a short-term loan for $850, with a 14 month term in her case, and pays it back with interest to KADET. 

When Julia pays KADET, KADET pays me, but KADET keeps the interest.  Wait, what?  Yes that is correct.  I get my capital back but no interest.  This is the sort of “charity” angle to this whole venture.  If I made the loan directly to Julia then I suppose I could collect the interest myself.  But that would be fairly inefficient to say the least.  It might be fun to go to Kenya and loan random people money to purchase motorcycles, but something tells me my skills are better suited doing something else.  So I let KADET do it on my behalf.  My capital is helping KADET to sell more loans than they might otherwise be able to finance.

When Julia/KADET pays me back, I’m free to turn around and finance another loan, or take my money and keep it for myself.  Therefore the money I’m loaning to KADET is not considered a charity deduction.  It’s more like a risky zero-interest savings account or something.  If I really needed the money, I could get it back eventually, assuming the Julia is able to pay it back in the first place.

But wait, I haven’t even mentioned Kiva at all in the last six paragraphs!  Yes that is true.  As mentioned, it is inefficient for me to track down Julia and loan her some money.  It’s far more efficient if I loan some money to KADET and let them go find Julia.  But KADET isn’t the only organization in the world doing this, and it’s actually rather inefficient for me to spend time tracking down organizations such as KADET.  And this is where Kiva enters the picture.  Kiva acts as a sort-of clearing house for many organizations such as KADET.  Over 100 of these organizations, as a matter of fact. 

So there are 4 entities interacting here:  Julia wants the loan, and contacts KADET.  KADET contacts Kiva.  Kiva contacts me.  I give my money to Kiva to give to KADET to give to Julia, who purchases a second motorcycle, and makes more money, and pays back the loan to KADET, who keeps the interest and sends the principal back to Kiva, who notifies me that I can re-loan the money, or take it back completely.  Kiva doesn’t take any of the interest from KADET or any of my principal.  Kiva is a charity so they solicit additional funds from me to help keep them operating.  And that little bit of money is charity, incidentally.

It’s just that simple, ha ha.  Simple, but risky.  You will recall that Julia wanted $850 to buy a motorcycle.  You know what, I don’t have $850 to loan to Julia, and even if I did I certainly don’t feel comfortable loaning her that much money, I don’t even know her.  I’m assuming all the risk here with no monetary incentive to do so.  But what if Julia was able to spread the risk to multiple people?  This again is where Kiva comes in.  Even if I wanted to, I am actually not allowed to fund all $850 of Julia’s loan through Kiva.  I can only contribute $25 of the $850, actually.  So Kiva looks to spread the risk of Julia’s loan amongst 34 backers including myself, each of us chipping in $25 for the motorcycle loan.  If Julia is not able to pay back the loan, then 34 people each lose $25.  

4/21/2011:  I've since found out that I can contribute more than $25 to a loan request; up to $500 actually, so the above statement is not quite correct.  I think I'll continue to contribute $25 per loan though, in order to spread out my risk and feel the excitement of participating in more loans.

So it all works.  Julia gets her motorcycle, KADET gets their interest, Kiva gets to do this cool clearinghouse micro loan charity thing, and I get a sense of well-being and even a little whiff of power!  Oh yes, this Kiva thing is a little intoxicating.  When I log onto Kiva I am presented with loan applicants from all over the world.  A quick glance at the web site right now displays applicants from Vietnam, Senegal, Peru, Kyrgyzstan, Armenia, El Salvador, Mongolia, Kenya, Philippines, Bolivia, and on and on.  I can search for loan applicants from Africa only, from women only, from the agriculture sector only, or from African women in the agricultural sector, if I want to get that specific.  I can read a brief biography of the loan, what they want to do with the money.  I get to play world bank!  If I think the project is good, I can give them my $25.  Julia from Kenya wants to by a motorcycle?  Sounds good!  Erick from Peru wants money to grow his metalworking business?  Cool!  Ikromjon from Tajikistan wants money to buy and sell antique chests?  Why not?  Point is, the web site plays to my considerable vanity and lust for power, and lets me think I’m the one controlling the purse-strings of development finance.  It’s all great fun.

But it’s a bit of a fait accompli on the part of Kiva, you see, because in all of these cases I’m actually just back-filling a loan that has already been distributed to the applicant.  That guy in Tajikistan who wants money for his antique chest business?  He already got the money a couple of weeks ago.  He’s not waiting for rich jackasses like me to decide if they are willing to finance his loan.  Kiva has already seen to that, and now Kiva is soliciting us to back-fill the money already loaned out.  So it’s a bit of a farce in that regard.  The money I “give” to Julia for her motorcycle may actually technically go to the next loan.  Kiva keeps up the charade of Julia “paying me back” throughout the coming year, and I suppose if Julia defaults then yes, I don’t get my money back, so I am backing Julia, but it’s not as cut and dry as Kiva would lead you to believe.

But for all of that I still like the concept.  And so do a lot of other people.  Kiva boasts the following statistics on their web site (as of April 11th, 2011):

$205,320,375
Total value of all loans made through Kiva:
572,657
Number of Kiva Users who have funded a loan (i.e. me): 
211
Number of countries represented by Kiva Lenders (i.e. my country):
533,973
Number of entrepreneurs that have received a loan through Kiva (i.e. Julia):
59
Number of countries Kiva Field Partners are located in:
275,207
Number of loans that have been funded through Kiva:
81.40%
Percentage of Kiva loans which have been made to women entrepreneurs:
131
Number of Kiva Field Partners (microfinance institutions Kiva partners with):
98.65%
Current repayment rate (all partners):
$381.89
Average loan size
6.75
Average number of loans per Kiva Lender:

I love statistics!  I had no idea Kiva had over 500,000 lender-backers such as myself.  Kiva has been around since 2005, and looks like it is growing rapidly.  In the two years since I’ve joined Kiva, I proud to say that I have helped finance19 loans.  8 of the loans have been fully paid back, and 10 more are currently being repaid, and are in various states of repayment.  One final loan was refunded almost as soon as it was distributed; apparently the local lending organization failed an audit by Kiva and was “fired” so to speak from Kiva for not following proper bookkeeping practices. 

The bottom line is that I’ve not lost any money on this venture, and I’ve been able to help fund some cool loans, like to a woman in Bolivia who owns a furniture making business, and to a woman in Ghana (holla!) who wanted to expand her food market business.  Obviously I’m partial to funding Ghanaian loans but I play the field.  I’m also partial to loans to Mali and Senegal, Kenya and Tanzania, and all the African countries of course.  Again, it’s my money, so I can apply my own biases when deciding where it goes. 

I am trying to put enough money into my Kiva account where I can fund a loan once per month without having to contribute any additional funds.  So if I make a $25 each month that means I will need to contribute about $300 of my own money into my account, assuming the loans take about one year to repay.  Some loan terms are longer, and some are shorter.  I'm not quite to that self-perpetuating state yet.  But when I am, when this thing is self-sustaining on a month-to-month basis, then as the loan recipients pay back their loans, every month I have enough to finance another loan and from that point forward I’ll never have to contribute any more of my money (assuming the loans get paid back!) 

I like that concept.  It’s as if I put up some money to start, but then people like Julia in Kenya are just using it for a bit, and then passing it along to say, Ikromjon in Tajikistan.  And when he’s done with it he’ll pass it along to Erick in Peru.  Or Senegal.  Or wherever.  That same $25 I was willing to part with gets passed around all over the world and helps people over and over again.  It’s so crazy it just might work.

And yes, I could just make a charitable donation to the Grameen Bank instead of bothering with all this Kiva stuff.  They do pretty much the same thing.  And I would get a tax break on the money as well.  I'm sure they would figure out who needs micro loans and distribute accordingly on my behalf.  Of course I’d never see the money again, and with Kiva there exists that possibility, but realistically I don’t plan on taking that money back.  Once I see the cool stuff people are doing with my money, buying "Hot Tub Time Machine" on DVD just doesn’t seem quite as pressing of a need.  Julia can use the money for a while, and then Ikromjon and Erick and so on.

And don’t discount the ego factor!  I want to participate in the process.  I want to have a say in where the money goes.  I want to click a button on my computer and save the world.  It’s all terribly vain, and a bit of a farce, really, but it is what it is.  I don’t have to always do the right thing for the right reasons, do I?  Can I sort of stumble into doing the right thing for totally self-indulgent and egotistical reasons?  I think I prefer that sometimes.  Then I can be more self-deprecating about the whole charity thing, and not be seen as such a tiresome do-gooder.  That suits me more.  I think I will buy that DVD.  And fund Julia’s motorcycle loan.  Best of both worlds.

Now if you’ll excuse me I need to loan Julia some money and head on over to Best Buy.

4 comments:

  1. Hey, thanks for posting this, Scott. I first heard about Kiva five years ago because my college alumni founded the organization, but was skeptical due to having an Epic Fail with microfinance (with Americans) on Prosper.com. (E.g., made 100+ loans to people with at least a Grade B+ credit rating; >50% eventually defaulted, resulting in a return on investment = -15%/3 years.) So I am both amazed and encouraged that not a single person has defaulted on you!

    I guess the difference is many foreigners applying for microfinance loans do so due to lack of financial services, whereas Americans who apply for microfinance loans do so because they have already over-extended themselves through traditional lines of credit or can't get a good interest rate due to a bad credit score or history.

    The charity angle of Kiva is attractive to me too, and 0% ROI beats -15%. Will have to look into it more. Pat yourself on the back!

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  2. My 2nd block econ class is the best! Actually we read this together and question your $25 limit. Can't people donate a total of $850 if they wanted to? Great work! We're going to jump into this next year!!

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  3. I looked into it, and yes, you can contribute more than $25 per loan, I just never bothered to check! Looks like the drop-down list on the website maxes out at $500 per loan. I actually prefer to loan smaller amounts to more recipients to minimize risk so I'll probably stick with $25 increments. Also I think it's more fun to make more loans, you can participate in more stories, so to speak.

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