Kiva lending for non-business purposes

Kiva is considering to add new types of loans to their portfolio, in addition to their existent category if business loans. Specifically, in a thread at Kivafriends.org, Ben Elbinger of Kiva is discussing allowing MFIs to add Building loans, Educational loans, Health loans, and General (personal) loans to their Kiva portfolio. The argument here is that anything that will allow a poor person to better their overall standard of living will alleviate poverty, even if the social impact is not optimal.

Here is an example of Kiva giving a loan for building personal property rather than for business purposes.

I think that Kiva absolutely should offer loans for non-pure-business purposes, as long as the loans will be paid back in a reasonable time and there is enough due diligence to ensure the repayment of the loan. Many Kiva lenders will fund these loans and be happy to do so... and many of these loans fulfill a real personal or family need that will allow the borrower to become a more (or again) productive member of society.

Having said this, personally, I am a little hesitant to put money in anything else but a business loan. The reasons for this are various and diverse, and insofar personal that any of us may have an equally valid, different opinion about the topic:

• Business loans are the most effective for reduction of poverty, IMHO. Investments in businesses can yield clearly identifiable financial returns. These returns are used both to pay back the loan and (more importantly) to grow the business and economic situation of the borrower
  
• Although personal property (building) loans are important, there may be better/cheaper ways of getting them than through microfinance. I think that all of this starts with the government providing title to property. This is something that institutes like the ILD have been promoting for a while now. Specifically in Perú (where the ILD is located), it is now relatively easy to get a home loan based on the actual value of the house, using the property as guarantee for the loan. This has brought down interest rates for home loans to around 10-15% annually; still higher than in the Western world, but a lot lower than microfinance rates.
  
• Education loans are interesting. Unlike in the West, education is mostly free or rather cheap. The loan is therefore often not used to pay for lots and lots of tuition, but mainly to offset costs related to studies (registration fees, study materials, cost of living, etc.). My problem with them is, that they are given without a reasonably short turn around expectation. This means, that the lender shouldn't expect the borrower to pay back until they finish the education and start earning money. Unless we're talking about a short course, this may be a while. For education, in all reality, I would propose investing more into a grant system (maybe based on the grades of the student?) rather than a loan system. This can be done for a fraction of the cost per student compared to the US higher education system.
  
• Health loans. Also interesting, similar to education loans. I'd assume that someone that needs a health loan is quite ill-- smaller health issues that don't impact the ability to work are often solved by cheap/free local clinics. (HINT: they need funding too!!!) If it impacts the ability to work, the effect is twofold: the person has to pay for more expensive health care procedures, AND can't earn income at the same time. This makes life very expensive. Loans (or maybe grants?) are definitely needed, but the risk of non-repayment is higher: what if the person won't recover enough to catch up with the lost personal finances AND pay back the loan? This translates probably in either subsidized loan rates or in higher interest. The latter is the "third strike"-- unable to work, no income, AND a more expensive loan to survive. Also here I'd favor a grant scheme that will help people pay for at least the health care part and maybe even for part of survival of their family.
  
• Personal Loans. Ugh. My mother still uses the expression all the time-- "de tering naar de nering zetten" (don't spend more than you can afford). Although I am sure there is a market for this, we just need to look at our own countries to see what a liberal "spend it before you can afford it" culture can result in. I'm not sure I want to see the average poor Thirdworldian up to his/her eyeballs in debt because of consumables that were not really needed. Am I am pretty sure I wouldn't want "my" MFI to be involved in this unless the loan is really necessary...
  

As a result, I think I'll do the following:

• I will continue to invest in business loans.
  
• I'd be interested in knowing more in educational and health grants and also in educational/health infrastructure improvement projects
  
• I would probably consider building loans, because I guess that the borrower WOULD have gotten a cheaper mortgage if one had been available...
  

Anyone any thoughts? (This would be a great topic to hear Kendall Mau's opinion on...)

Finally... Bolivia!

Ciriaca Colque is her name. She runs a milk transport business that brings milk from the farms in the Altiplano of La Paz to the local Pil Andina diary factory, in El Alto, Bolivia. El Alto literally means "The Height", and high it is: 4150 meters (13,615 feet). This is where the international airport of La Paz is located. If you're gasping for air to jump on such an opportunity: slow down, take a breath. A nice warm cup of Mate de Coca will help you adjust to the lack of air.

El Alto can be a bit volatile, politically speaking. Since it is an important part of Bolivia's transportation network, it was often a flashpoint between past business-oriented governments and left-wing indigenous organizations. Violent protests occured, and El Alto played an important role in the Bolivian Gas War, which ended when the current president Evo Morales came to power.

I invested my biweekly contribution in her business. Want to contribute too?, or maybe help someone other entrepreneur in need?

Sra. Ciriaca, ¿kunjamaskatasa? ¡Le deseamos mucho exito en su negocio! ¡Yuspagara, Jakisiñkama!
(OK--- take a guess what it said, what language (I'll give you Spanish as one of them) and post your response in the comments...)

Paying interest to Kiva lenders

Disclaimer / Challenge: please note that the blog post you're reading is based on my personal insights and logic I think is true. As I have no economics or financial background at all, I would be thrilled to be proved wrong. Please let me know if you don't agree with my logic or assumptions, or if you think there is more to the story than the side I present here. This is an important topic that goes to the core of "why Kiva". Please post comments, or email me if you want to keep it private.

There is a long, ongoing discussion at Kivafriends about Kiva paying (or not paying) interest to lenders. I've given my opinion on this topic already in the past (specifically in the Kivafriends thread that I linked to above), but here's some more in-depth thought:

I think that parts of Premal's interview with the PBS series Frontline/World give some specific clues about why Kiva is considering giving interest to lenders.

Let me start to repeat myself: personally, I am not at all interested in getting interest for my current loans. But, truth being truth: this attitude does tremendously restrict the amount of money I am willing to invest in Kiva loans. In this interview, Premal specifically said:

And in truth, there's a lot more money in the investment capital pool than in the donation capital pool.

This kind-a says it all. Currently, there is no need for Kiva to give interest to lenders. Giving no interest keeps the cost of money to the MFI low. If Kiva would give interest to compete with money market accounts, it'd be somewhere around 5-7%: 3-5% of actual interest, and another 2-3% to cover the risk of loan default. If you'd put in a large sum of money spread out over many loans, the lender would need 5-7% of interest per loan to get an actual return of 3-5%, which is in line with current US money market accounts. The argument here would be that it would be a pure financial return and no emotional return.

I don't think that charging that much interest would be feasible. It would immediately kill Kiva's value proposition to the MFIs, because now the cost of money to the MFI quickly approaches the commercial loans that are already available to them.

In all reality, the current "no interest"financial return should long-term be somewhere around -2 to -3% (which is the expectable long-term default rate), maybe even a little bit lower-- what happens if the lender or the MFI cannot pay back because of exchange rate problems? The MFI is specifically supposed to cover this, but this could easily put loans in default in countries where for some reason the currency exchange rate goes haywire. The probability of loans default because of change in macro-economic circumstances would need to be added to the expected default rate.


So Kiva is looking for the "golden path" between financial and emotional return. Giving a few percents of "positive" interest won't create a real financial return for investors that is comparible with what they would get in the market, where a diversified short-term investment yields around 4% ($10K MMA account or CD, source: bankrate.com on April 24, 2007). They will -best case- break even on their loan if Kiva gives 2-3% interest, as is my understanding of the current state of things.

In summary:

• Kiva should only give interest if the market-need for money (i.e., the amount of micro-loans to be raised) is so large that loans can't be fulfilled with the current set of charitable lenders
• In order to compete with commercial loans, Kiva would need to give around 7% interest to lenders: ~4% real interest, and ~3% to cover for losses because of expected default. This would put the loans in range of similar investments.
• Charging 7% interest kills Kiva's value proposition to the MFIs.
• Kiva could consider giving a little bit of interest (say, 2%) to lenders.

Would the latter work?
Unfortunately, in my opinion, I don't think so:

• Giving 2% interest to lenders won't attract the huge amount of commercial investments that would be needed to exponentially grow Kiva.
  
• As for the marketing (PR) effect of this, I think it will be PR-neutral: it will attract some new lenders, but it will equally put off lenders that invest in Kiva loans because of charitable reasons: they will feel a reduction in emotional return, which is their main reason of investing.
  
• In reality, all it will do is make the loans a few percent more expensive for the MFIs, and thereby reducing the social impact that this has on the poor, Third World micro-entrepreneur. And this social impact is what makes Kiva so great compared to other lenders out there.
• In conclusion, the choice would be to make a small impact on a very large set of poor, Third World micro-entrepreneurs or to make a large impact on a few. My personal choice is the latter.
  

Which brings me back to the (now updated) original position: I don't want interest for my Kiva loans. But if I'd want interest, it would be too high for Kiva or the Third World borrower to afford.

All Kiva investments on one Google Map!

Following Pondering Pig's example, I created a My Google Map (or a Google My-Map or whatever) for my investments. Here it is.

Some other users Kiva Maps:

• Christopher from London
• Fred from Texas
• Pomerleau Family's map
• Pondering Pig's map (which we already mentioned, but it never hurts...)
• Julia's map
  

If you have a Kiva Loans map, let me know and I will add them to the collection. You can also post them at this thread at KivaFriends.Org.

Poverty: why bothering is good for us

This post is in direct response to Richard Kent's encouragements to keep on investing in Kiva, in a thread at the Kivaloans Yahoogroup mailing list. Richard is the Ugandan CEO/D for Children Care Ministries, a religious based charity in Uganda.

My reply got a little long, therefore I post it here rather than sending it to the list.
--------------------

Hi Richard,

thanks for your remarks on poverty. I think that's why we're all here at Kiva, to reduce poverty in a way that makes sense.
As someone that lives on the other side of the equation, it is hard to see billions of dollars and euros wasted in the developing countries to bad governance and and overall development aid attitude that used to be like giving fish to the people, instead of showing them how to fish themselves. I lived in Nicaragua in the 1990s, and I saw that many development projects weren't used at all to their potential: For rural developments, money would be spent without measurable improvement at the end of the projects, an expensive ferry project was successfully delivered and operated for about a year before it fell apart due to no maintenance, and projects to build schools weren't completed because the parents didn't want to cooperate. Overall, not good.

After a while, you ask yourself, why even bother?

Well, Westerners, we should. In this age of globalization, the economic empowerment of the poor in the developing world is not only good for the poor, but is essential for our own continued well-being. We need everyone to be prosperous enough to effectively produce whatever we need, and we need them to be able to buy whatever we produce. That won't happen if more than half of the population is too poor to feed and educate their children. And I don't even want to start about moral obligations, the nowadays always present homeland security arguments, etc.

In my opinion, the road to success doesn't lead to socialism as some of the socialist-leaning Latin American countries are now proposing. The reason for that is, that too much collectivism will stifle the individual drive to success, and therefore not give the individual the incentive to get ahead in life. Things don't come free in life, you got to invest, take risks, and learn from failures. While it's good to have a government that makes sure nobody falls through the cracks, you shouldn't have to rely on anybody to help you get beyond the mere basics of survival. Don't understand me wrong-- I'm not against collective bargaining or trade unions. Actually, collective bargaining is a sound economic principle: it's the reason of existence of the United States, the European Union, and on a much smaller scale, it's exactly why things bought wholesale are much cheaper than buying small quantities at the local corner store. It's a principle the staunchest capitalists use all the time.

I think that the development of the poorest should be based on specific short-term, medium-term, and long term goals, such as:

• Short term: Micro-finance those people that have businesses and business ideas that have to potential to increase their income substantially. This will have all the well-known effects on those that receive micro-financing, but it also has the good side-effect of showing those on the side-lines what can be done, how it can be done, and enticing them to "work smarter" instead of just working harder... Kiva can play a good role in this.
  
• Medium/long term: This is where NGOs and Governments can have a big impact. A number of issues would need to be addressed, and most of them are interrelated:
• Infrastructure. In order for people to do business, we need roads, telecommunications, etc. With good communication and transport, the cost of doing business will go down and the geographical reach will increase. This means more opportunities at a lower cost. It will also allow people to increase their standard of living by being able to live in a place that is good to live in.
• Education: This is really important and interrelated with the infrastructure goals. A higher educated workforce is more prosperous. Higher educated people have a better chance at earning more money. This is true everywhere: in the western world as well as in developing countries. And it cannot be reached without having a good infrastructure in place, both to get students to schools, to get good teachers to teach, and to be able to build a good school curriculum.
• Health: Health and access to health care is very important because it will allow people to stay in the workforce and increase their economic abilities. This means that we need accessible clinics and good hospital care that allows those with sick family members to stay economically active. The economic opportunity cost caused by illness is disproportionally large in poor communities.
• Legal framework: A good legal framework and good working legal system is a cornerstone of success for all businesses. In that sense, I am a believer in the work the ILD and Hernando de Soto is doing. Giving title to property, and being able to enforce titles, contracts, and other business instruments will allow a business to effectively use the capital that is "hidden" in their business equity. Land with title is worth more than land without, a contract that is enforcible will be more reliable and therefore worth more.
  

Enough for one post... feel free to leave relevant comments!

Yippee-a-yay, Haiti here we come!

It all started with Ben Elbinger's cryptic message to the Kivaloans Yahoogroup last night. A new country was coming on-line. A NEW COUNTRY!

Interestingly, a new country on Kiva.org is an occasion for excitement, enticement, and loan-spending debauchery. Especially when that country is this infamously poor. It's the only country in the Americas where the UN is actively soldiering, and it ranks infamously in the bottom tier of the Human Development Index-- the lowest of any in the Western Hemisphere.
Jean-Bertrand Aristide move over.... here comes Kiva. (Oh... sorry... the Haitian already took care of Aristide themselves. Credit where credit is due.)

If you live in Haiti, your prospects aren't particularly good. There is poverty and more poverty. There is violence and more violence. There is anarchy and more anarchy. In short: this is a place where jump-starting the economy from the bottom up makes a lot of sense.

Hence the excitement under us Kiva-ists.

The Kiva partner MFI that services Haiti is Esperanza International, with whom I already have a loan in the other side of Hispaniola-- the Republica Dominicana. And Esperanza appears to have a preference for Group Loans. They also provide business training and support to their borrowers.

The group loan principle is interesting. The way Kiva implemented this, is through a single loan to the "group leader". And although the group leader's business is featured in the loan description, the loan is distributed over multiple recipients that are jointly responsible for paying back. As long as the joint intention is to pay back, this actually has proved to increase the payback ratio. I've heard (mainly in some articles about Grameen's activities in Bangladesh) that this group loan principle can backfire too, when the group uses it's outstanding loan to collectively bargain for benefits, like new loans to people that would actually not qualify on their own.

My Haitian Star Entrepreneur is called Ivonne Soincilier, and she is from a place called Trou du Nord. (This literally means-- Hole in the North.) Among other things, she makes candles that are for use during the frequent power outages. Very much needed. Interestingly, thinking about the big picture, economic development will help her indirectly by better access and cheaper prices, but will hurt her indirectly by stabilizing the electricity supply and thereby reducing the need for candles. Still-- she will be successful, I am sure. She also makes soap, and I cannot imagine that anyone could use LESS of that over time! The sun will shine brightly over the Soleil Brillant business group. Bon Chance!

Finally, below is a quote from Ivonne's lender page:

Ivonne is a member of the Soleil Brillant solidarity group. She and her business represent 9 other micro-entrepreneurs who are members of the same solidarity group. Each members will receive a share of this $1,200 loan to develop their respective businesses. The cost of living in Haiti is such that Esperanza is able to fund 10 entrepreneurs who must make each payment together. If one person is unable to pay, the other members must make up the difference before any payment will be excepted. The community of 10 entrepreneurs have gone through Esperanza´s business training courses and have demonstrated their commitment and aptitude for receiving a loan to expand their business. Ivonne and the other members are responsible for working with one another as a social support network throughout the loan repayment and business development processes.

Go see Kendall Mau's blog!

For those of you that haven't visited Kendall Mau's blog in a while, or that haven't visited his blog at all, please do so. He recently added a WEALTH of information about the inner workings and considerations of the MFI he runs in Honduras and Nicaragua, Prisma Microfinance. There are interest rate tables, a discussion on large loans vs. smaller loans, flat rate interest vs. simple interest, some interesting background on who their target customers are, etc.

Really, really, interesting! Thanks, Kendall, very much appreciated!

Small loan to Dunia Herrera in Choluteca, Honduras

Since it's a new month, I just entered by bimonthly loan, my loan number 12. This one is to Dunia Herrera, why sells cloth in Choluteca, Honduras. Choluteca, in addition to having a cool name, looks on Google Maps just like the place I'd like to spend some time on vacation, with nice, palm-tree lined roads, grid-square neighborhoods, arable land along the river, and about half an hour's drive to the ocean. Looking at some of the pictures at Flickr.Org, the place looks reasonably clean, colonial, very much like an old, provincial town that you come across in so many Latin American countries.

Although this helped, the reason I invested in Dunia's business, is because I wanted to see how I'd fare with a small, reasonably short-term loan. All Dunia's been asking for is $225, which is probably the equivalent to about 2 months salaries. She'll pay this back in about 6-8 months, which comes down to about $40 per month, including interest. Assuming that her investment is "sustainable", which is, that she is able to increase her income on a continuous basis by at least the amount of loan payback, she's adding at least $40 to the family income per month. For many people in Latin America, this is a substantial increase of their monthly income.

She got my vote, and, as usual, I vote with my feet... eh... wallet. Her loan is now fully funded. Mucha suerte, espero que el préstamo hará una diferencia.