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.
- 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.
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.