Kiva Confusion
by Jeanette Thomas: Monday, November 9, 2009
The New York Times just picked up on the buzz caused by David Roodman’s blog post pointing out that Kiva doesn’t lend directly to poor borrowers. Likening the revelation for many individual lenders to the scandal in the 1990s when many child sponsorship organizations amended their disclosures after the Chicago Tribune revealed that the money they were raising was not necessarily going to the specific child whom the marketing efforts implied was being reached, the article points out that Kiva has already amended the language on its Home page. It no longer promises: “Kiva lets you lend to a specific entrepreneur, empowering them to lift themselves out of poverty”. Instead it more accurately describes its role as: “Kiva connects people through lending to alleviate poverty.”
As Deb Burand has pointed out, the lending model also has implications for microfinance institutions. Deb highlighted the issues MFIs should consider when engaging with online lenders in a paper published by CGAP last year.
In April this year Deb asked microfinance lenders to consider a nightmare future scenario in which online lending, undermined by disreputable lenders, is characterized as a Ponzi scheme. And she offered some advice for how reputable lending platforms like Kiva, and the microfinance industry as a whole, could avoid that scenario. Thankfully we’re not facing headlines like Deb imagined (“Online Do-Gooders Cheated”), but milder concerns about confusion over where exactly the money goes. Nonetheless, her advice holds for what is needed to clear up the confusion: incentives for greater transparency; a code of conduct for online lending platforms; educating online lenders to make informed choices; and the community of online lenders sharing their experiences, both good and bad.
David’s thoughtful post isn’t scaremongering, and the online discussion it’s provoked only contributes to educating online lenders about where their money goes. (The Microfinance Gateway also posted a piece some 18 months ago examining different online lending models.) Let the online clatter continue.
3 Comments
November 14th, 2009 at 8:25 am, Ryan Calkins ()
In addition to planning for a nightmare PR scenario, I have advocated that microfinance organizations adopt ever better strategies for poverty alleviation, including microsavings. The proof is in the pudding, and if microfinance is alleviating poverty, bad PR won’t have traction.
Here’s the article on microsavings: http://www.seattlemicrofinance.org/microfinances-circular-firing-squad/2009/11/10
November 20th, 2009 at 12:14 pm, Aurélie Duthoit ()
Controversy or not?
A debate seems to be rising about the way peer-to-peer microcredit platforms work. It may not function the way it seems.
The presentation messages of Kiva.org, the American pioneer, might have led the internet users to believe that their online loan was directly allocated to a beneficiary who was (im)patiently waiting for it. Yet, the most curious and interested recently discovered that Kiva was in fact a refinancing platform on which internet users only refinance projects already financed by the microfinance institution (MFI) with its other resources.
What’s going on? What is Babyloan’s opinion on the subject?
In fact, there are two possible ways for such platforms:
- Direct financing : the beneficiary waits to be financed by the internet users and gets his microcredit once the MFI has received the money
o Advantages: 1. For the internet user : it’s true and direct peer-to-peer lending
2. For the MFI : the management is easier for the MFI since there are no distinction nor time gap between the financial flows (money transfers, repayments, etc.) and information flows (progress of the project of the micro-entrepreneur).
o Drawbacks: 1. For the beneficiary: the development of the beneficiary’s subsistence activity depends on the “clicks” of the internet users and thus on the popularity of the project (picture, theme, etc.). Yet, obviously, what is fashionable here (organic products, fair trade craftwork) does not necessarily corresponds to the reality on the field…this is what we call “microcredit reality show”!
2. For platforms like Kiva and MFIs: to make true P2P lending, the money should be sent as soon as the total amount of the loan has been raised from the internet users. This could represent dozens of money transfers per months, which are costly for the platforms and for the MFIs who receive the money. The high cost of true P2P lending could endanger the economic model and durability of such platforms when the minor profit margins they choose to take already make it long and difficult to reach the economic balance.
- Refinancing: the internet user refinances microcredit beneficiaries already or about to be financed by the MFI (Kiva’s model).
o Advantages : 1. For the beneficiary : the project can be developed even if internet users do not eagerly refinance it – which is essential, especially for agricultural or seasonal projects.
2. For the MFIs: since they advance the money needed to finance the entrepreneur’s project, they can manage their accounts more strictly and be less dependent on the fluctuation of the internet users’ generosity. They are able to anticipate since they do not work “just-in-time” with the platforms.
o Drawbacks: For the internet user: the model seems less true.
For Babyloan, we chose the same model as Kiva, i.e. refinancing, since we think that the “reality show way” is iniquitous. And we chose to announce it one click from the home page : http://www.babyloan.org/fr/Fonctionnement-Cycle_Mon_Argent.html
Kiva seems to have oversimplified the explanations, maybe leading to believe that its model pertains to the first way rather than the second.
On all subjects, Babyloan always thought that the complexity of this new solidarity tool required, in all respects, the greater transparency. During the preparation of Babyloan’s website, it seemed essential to be completely transparent, even if it meant discouraging some internet users. This is what clearly transpires from the contracts signed by the internet users and from the explanations of the website. By the way, certain members already questioned us after reading what we wrote. Many press or internet publications explained our refinancing mechanism very simply, because that’s the way we always explain it.
Fundamentally, Kiva deserves all the credit for inventing this wonderful solidarity tool. There would not be around 15 platforms of the same kind around the world without this invention, let’s not forget about that.
The refinancing model we have chosen does not make it useless. Indeed, if an internet user chooses a beneficiary and its money is allocated to this beneficiary, the credit line already advanced by the MFI is available again, which enables the financing of new beneficiaries and thus the development of the MFI.
Let’s go further. In the case of a direct financing mechanism, the MFI should publish projects that have not yet started on the field. For example, the internet users would decide to support Kim’s project to raise chickens. By the time the total loan amount is raised and sent to the MFI, the project may change (decrease in the price of pigs which would make Kim change her mind, deep change in her personal situation).
What should platforms like Kiva and Babyloan do in such a situation? Do not inform the internet users about this change – the worst choice in terms of transparency, ask the MFI to publish the new project, tell the internet users and repay them if necessary? Imagine how complex this would be and what workload we would impose on the MFI. This would take us away from our mission: support these institutions and their beneficiaries.
In the Kiva and Babyloan model, the internet user definitely contributes to the development of the project of the entrepreneur he chose to support and of the MFI, which is essential.
Fundamentally, as far as the interests of the beneficiary and of the MFI are concerned, this “controversy” is unfounded. Kiva’s mechanisms, such as Babyloan’s, do reach their objective which is to enable the MFIs to finance the greater number of beneficiaries.
If Babyloan decided to be transparent, it’s less for fear of controversy than because we chose the refinancing mechanism. We take the entire responsibility for this choice and can justify it (increased computer complexity, possible additional workload for the MFI, higher costs, etc.).
However, what is clearly at stake here is the allocation of the internet user’s money. Whether it is refinancing or direct financing, the money is fungible and arrives on the outstanding account of the MFI before it is allocated to a beneficiary. It is then physically impossible to prove that the 20 Euros of Ms X, fungible by nature, will be delivered personally to the beneficiary she chose. It is simply impossible. What do we do then? We ask the MFI which receives this money to justify that this 20 Euros is really allocated to the beneficiary chosen by the internet user.
There are two possibilities: either the MFI has got a sophisticated information system which enables her to track on its accounts the credit line allocated to each of its beneficiaries. Then it’s easy: the MFI just has to create for our beneficiary a credit line called “Babyloan”. Yet these very refined systems are quite rare among MFIs. Concerning Babyloan, every six months, we ask the MFIs to officially certify that the money they receive is really allocated to the beneficiaries supported by our members. They send us a certificate signed by the directors of the MFIs. This document lists all the beneficiaries that were supported and refinanced by our members and the money received for that purpose. It is a major constraint for the MFI which makes the commitment to allocate the money to credit outstanding (not to its operating costs) and certifies its real allocation (which would have been the same in case of a direct financing mechanism).
The solution to this problem requires the improvement of the MFIs’ information systems. In the future, they might be connected to the peer-to-peer platforms which would mechanically allocate the money of each loan to the chosen beneficiary.
This is what Babyloan launched with the credit monitoring software OCTOPUS. A version was adapted to integrate a Babyloan application. It enables the MFIs who use it to automatically upload beneficiaries on Babyloan’s website and to allocate precisely the money lent by the internet users. This tool has yet to be improved to be used by the greater number of MFIs. Its use has to spread, but this is another story.
It is obviously essential that the flows generated by peer-to-peer platforms should be completely transparent. The standards of the profession are being established little by little, based on experience and have to be clear on that matter. A few weeks ago, in France, we decided with the support of the national regularity authorities, to work on the redaction of national regulatory standards for this new activity.
That is what it costs to be transparent and we are proud to be the standard-bearer. It is an essential matter. Every platform must satisfy the verification of its eligibility with regard to the regulations of its country of activity. That’s what Babyloan did during the six months before its launch, with the Banque de France (central bank of France) and the AMF (French financial markets authority). By the way, we paved and smoothed the way to future French platforms that might emerge…
The platforms also have to make sure, with their MFI partners, that exchange control constraints do not tarnish the models.
Microfinance has just revealed its first youthful mistakes. Unfortunately, it is not illogical that peer-to-peer microcredit does the same. In both cases, it is commendable to discuss the matter in an open and constructive way so that the governance rules of this new activity can be established as soon as possible. There is no reason it should be otherwise.
Aurélie Duthoit et Arnaud Poissonnier (co-founders of Babyloan)
(Translation from fr to eng : Anne-Laure Buisine)
December 22nd, 2009 at 11:55 am, giulio quaggiotto ()
Excellent post (and great comment from the Babyloan folks)! I linked to it from here http://psdblog.worldbank.org/psdblog/2009/12/non-profit-web20-and-the-where-does-my-money-go-question.html.
Cheers,
Giulio
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