Interest for Kiva Lenders -- why maybe yes, and why maybe not

A topic on Kivafriends that doesn't want to die (which shows its importance), is whether to offer interest rates to lenders or not. And it's a topic that I can't stop pondering about-- I've often said that I support it, but that I prefer the "feel-good" interest-free loans that I give now.

So yet another brain-dump, this time looking at the players in the Kiva value chain and the influence of interest on them.

If you are interested-- get a cup of coffee. This post promises to become a long one :)

Before we start... since I do volunteer work for Kiva, I feel the need to give you this disclaimer:

I do NOT have inside information that gives me more insight in Kiva's finances, objectives, dreams, etc. anymore than any of you have. Some figures are projections that I make based on some research outside of Kiva (e.g., the 500 million microlenders that I mention). I definitely didn't discuss these numbers with Kiva, I have no clue if Kiva agrees and, although I would love for Kiva to comment on this in a public forum, there is no way I represent Kiva's or their employees' point of view. In short: this is my opinion and mine alone, my precious!

Let's take an analytical look at the players that are involved in Kiva's value chain (and this is extendable to other, commercial P2P microfinance value propositions):

The entrepreneur-borrowers

• Generally poor to very poor
• Microfinance is the one single shot that allows them to make steps towards better prosperity
• Generally entrepreneurial, since that is the most common way of earning an income when the formal economy lets them down
• The problem is not that they have to pay interest, but that the informal "village" lender's rates are exorbitant and the collection methods inhumane
• Actually, repayment and paying interest gives a commercial character to the loan, a trust that is being extended, with a higher expectation of creating results than a interest-free loan or a gift.
• As a result, the "moral hazard" should decrease and the probability that the money is used to increase the borrower's wellbeing is increased

The MFIs

• There are small and large MFIs, for-profit and not-for-profit. Kiva works with all categories
• Generally, smaller MFIs can better address a local need or an underserved area than a larger MFI. Their policies can be more flexible
• Sustainability is very important. If the MFI is not self-sustainable, it cannot provide the service that allows the poor to better their living standards
• Loans come first, education is second. As Mohammed Yunus already concluded, the poor already have the basic skills that is needed to provide a craft or service. What they lack is the means to make it possible. In second instance, the MFI can offer business education to enable the entrepreneur to keep on growing.
• Only part of the loan money of an MFI comes from Kiva. It would be a bad decision for long-term sustainability to be dependent on a single source of funding
• Generally, MFIs don't offer cheaper loans to those entrepreneurs that get their money through Kiva. The money that is saved, is invested in expanding the reach and programs of the MFI, or generally to create more sustainability so they can keep on serving the poor
• Making a profit is NOT bad for the MFI. A reasonable profit (not: highway robbery over the back of the poor) will allow MFIs to be organized for efficiency.
• Competition among the MFIs in a region is not bad. This will ensure that the interest rates stay reasonable.
• Large, commercial MFIs profit the same way from Kiva as small, start-up MFIs.
• Generally the need for microloans on a worldwide basis is about 10x the current availability of these loans.

Kiva

• Kiva takes money from individual lenders and provides this to MFI, to be credited to a specific entrepreneur.
• Kiva does not derive their income from direct interest over the loan money charged to the lender or MFI
• Kiva's main form of income is currently through grants, charity, and voluntary lender contribution. This is a rather uncertain income stream.
• Kiva's current contribution may be large ($6M in less than a year), however in the large scale of things, it's still only a drop in the bucket. Micro-summit Campaign data from 2006 shows that there are 500 million potential micro-entrepreneurs in the world, that are currently server by 3,300 MFIs.
• In order for Kiva to make a real difference, it needs to grow drastically
• Currently, Kiva seems (Ramón projection) to be more restrained on the loan offering than on the money offering: it's a buyer's market.
• In order to grow to the size that Kiva will be a real world power against poverty, it will need to take on many more MFIs and loans. This will mean that it will need to linearly grow its infrastructure (and therefore, costs) with the amount of money disbursed
• When Kiva grows to the point that it is this world power against poverty, it will need much more funding for loans than is available now. If they want to reach, say, 10% of the market, and each person wants to borrow $500 (less than current Kiva average), they'd need $25 billion.
• If the average Kiva lender puts in (complete guesstimate) $100 total, this means we need 250,000,000 lenders. That's $100 by 83% of all the US population, including children. That seems unfeasible.
• Therefore, to be a powerhouse against poverty, Kiva needs to find another way of funding these loans. Ideas: grants to Kiva that are used for actual loans (and not for operational expenses), or enabling commercial investors (banks, investment community, individual investors) to participate in a for-profit way.
• Some of the additional benefits of Kiva would be eroded by this: although they probably will be able to compete easily with commercial microfund investment portfolios and mutual funds, some of the benefits for the MFI would decrease: the access to "free" money, where the lack of interest rate allows the MFi to become more stable or offer additional services.

The Kiva lenders

• Current profile: western, middle to upper-middle-class, socially engaged, looking for emotional returns only
• Most have more than a single loan (is that true? or do I just see the most vocal tip of the iceberg?)
• Currently, they make up a small percentage of potential lenders that fall into this category. (There is still a lot of marketing to be done...)
• They make up even a smaller percentage of the capital pool that would be available if we would also consider "commercial" individual lenders

So-- as you can see, I have intermingled lots of facts with some opinionated conjecture. I really want YOU to take your own conclusion about this.

I will go on lending as I do currently, but the hard question I have to ask myself is this one:
If Kiva would offer a 3% interest rate on my loans, would I continue to budget myself and loan for free as I am doing now, or would I -at once- put a substantial part of my savings against it? Really-- if my return is similar to the one at my savings account, what do I have to lose?

As the above is clearly my own opinion and thoughts, and I in no way hold a "lease on the truth" (Dutch expression), I welcome discussion and dissent. Who dares?