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?

Where the streets have no names and the poor have no chance

It's been a while. Work has been busy (my company was just bought by our largest competitor), and although I've been able to contribute various posts to KivaFriends, I haven't been as active as I'd want to.

Reading through Kendall's reports on the state of his MFI in Nicaragua, I was reminiscing about old times.

I lived from January 1994 to August 1995 in Managua, Nicaragua. I came there as a student, did a graduation project designing and installing a remote wireless fumerola measurement station, that measured the temperature of smoke coming out of Nicaragua's most famous volcano, the Momotombo. After that, I worked for about a year at Siemens' Nicaraguan field office, as a project engineer for most of the "Planta Externa": everything from fiber optics transmission lines to wired local loop. Anyways, you can read that in my LinkedIn profile if you are really interested.

Nicaragua was an interesting country. Doña Violeta de Chamorro was in power, and Arnoldo Alemán was still the very popular mayor of Managua. Poverty was extremely widespread. And the population was very much polarized: you were either a Sandi, or against them. There was no golden path through the middle. Subsequent years have both show a slight increase of GDP (which is now slightly above Honduras), and unfortunately also an increase of corruption by officials. In all reality-- it was more of the same: Somoza's control over the complete economy by force, subsequently replaced by the Sandinista's "piñata" (redistribution of nationalized property to the personal possession of the top Sandinistas); Doña Violeta's government was accused of corruption (but may have been the least corrupt of them all), and once Arnoldo Alemán became president, he turned corruption allegedly into wholesale robbery.

The per-capita GDP in Nicaragua has stayed stably low from the years the Sandinista's left office, in the $3,000 to $3,500 range or $250-$300 per month. That this number doesn't mean too much (except that it's shamefully low), becomes evident if one considers that the gap between rich and poor is the 5th worse in the world. That means that tons of people live on much less, while the lucky few are rich beyond imagination. On average, you'll get to an income of $250 a month. As an aside-- click on that picture on the left. It was made with with GapMinder, a really fantastic tool that brings poverty into perspective.

Interestingly, although the Sandinistas messed up in many things, Nicaragua did get quite a good educational system. If we disregard some of the extreme poverty issues (like-- kids that need to go out on the street to beg for money won't get time to study, because this will take away necessary family income), primary and secondary is free while tertiary education is very affordable, even for local standards. Although rural access to health care is limited due to low popular density, free or cheap clinics are available in most urban areas. Arnoldo Alemán did shore up the road infrastructure, and cellphone coverage was good even when I was there in the mid-nineties.

This shows that even if many of the conditions are there to make things happen, it's really good governance that is a prerequisite to enable economic growth from the ground up. If that is missing and all is stacked for the rich and against the poor, not much will help. Even microfinance of poor micro-entrepreneurs won't be able to break the glass ceiling in the crawlspace of economic misery.

Finally, an anecdote. Kendall Mau talked in yet another one of his great blog entries about the lack of verifiable addresses in Central America. This is especially true in Managua. I remember that the travel agency I used in Managua was at "Donde fue el Hospital 'El Retiro", 2 cuadras al lago, 1 cuadra al arriba, portón verde". (That's from the spot where the "Retiro" hospital used to be, 2 blocks towards the lake, 1 block "up" (east), green gate). This was in the mid-90s, and it still appears to be the case. What made it even more interesting was that the Hospital 'El Retiro' was completely destroyed in the 1972 earthquake, and as a reference had been completely disappeared for many, many years.

If you had to do much through the mail, your best bet was a PO Box at Managua's central Telcor post office, which was an old, stately building in the old downtown, which somehow miraculously survived the famous quake.

During the Sandinista era, the rock group U2 performed a concert in Managua. It was their inspiration for the song "Where the streets have no names".

First loan fully repaid

Yesterday, I received the following message from Kiva:

From: Kiva
Date: 3 May 2007 21:43:26 -0700
Subject: Loan Redemption
To: ramon

Dear Ramon,

This email confirms that $25.00 of your loan to Venta de Mercancia por Temporada is now redeemable.

This amount can now be re-loaned to another business, donated to Kiva or withdrawn.

Kiva

To view your Kiva loan portfolio go to:
http://www.kiva.org/app.php?page=account
______________________________
Loans that change lives
http://www.kiva.org/

A big hurray for Antonio Luna. He paid back his loan. We'll reloan the money to someone else now. I'm hoping for Guatemala to come online soon...

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!

Kiva and longer loan terms

As I have described over and again, my believe is that in order for a micro-entrepreneur to be successful, the business (and thereby inferred--the micro-loan) needs to fulfill several objective and subjective criteria. If they don't, then the loan is not for me to invest-- it doesn't mean that I don't believe that the person won't pay back the money, but more that the loan won't have the impact on the business that will allow it to thrive, and thereby allow the entrepreneur to get ahead.
One of the criteria that I apply is based on the "general" loan-amount to repayment period. This was based on the following thoughts:

• The loan amount is in general directly related to the amount of extra revenue a business can make. Too much money can be risky, while too little money won't make enough of an impact. Generally, I am looking for a loan that will allow the entrepreneur to increase revenue at least by a factor of 2-3x the loan amount over the repayment period .
  
• Generally, I'd want revenue to be such that it will allow the borrower to repay about $100 per month in principal.
  

As a result, I was looking for $500-$1000 loans that could be paid back in about 6-12 months. I didn't want to be too rigid in applying the principles, but rather reject those loans that would be well outside these bounds.

And then I ran into a problem. As I didn't have any loans in Nicaragua, I was looking to add one. However, the loans available there, all through Prisma Microfinance, have a payback period that is about double of what I would expect.

So I emailed Kendall Mau, Prisma's CEO. And he was more than happy to converse with me on the topic. Here is an extract of his take on this:

Ramón: "The main reason for my concern is the ability for a small amount to really make a difference for a borrower. I assume that, due to Kiva rules, a micro-entrepreneur can only have 1 loan at a time. If a loan (for example) allows the borrower to sustainably increase revenue 3x the loan amount, the growth of the business is limited by 3x$nnn over the loan period. Alternatives would be to loan more over the same period (risky) or pay back quicker. Then, the borrower could qualify for another loan, which would allow them more growth in a shorter period."

Kendall: "I had this same thought, but my borrowers told me my theoretical thinking was not correct. If you make them payback faster, you are taking away the capital that they need to buy the materials and grow the business. This is why I see so many competitors out there giving really short loans, asking for payment every week or even days. The poor borrower isn't even putting the materials into use to produce the necessary income. If you're already having to payback substantials parts of the principal of the loan, you've stripped away the whole purpose of the loan. This is why we choose to give them longer paybacks to earn enough money to get ahead.

"I'm also an international consultant in the field. I was doing a project in Azerbaijan last year. They couldn't figure out why the borrowers were not improving financially. I looked at their loan fund and found that they were requiring such short payback periods that the poor borrowers didn't even have time to get the money working. Once we adjusted the payback periods, the borrowers were able to realize more revenue."

Well, let's say this. For me, now two of my 11 loans are through Prisma: one in Honduras, and one in Nicaragua. If Kendall can base his entire MFI's business on this principle and still make a social impact, I can support him in that with a few loans.

Soon to be Republica Bolivariana de Ecuador?

One of the advantages of investing into a local opportunity through Kiva is, that you, consciously or subconsciously, keep better track of what is going on in those countries in which you invested. And therefore, when things are happening in Ecuador, it jumps to the attention as more than half of my Kiva loans are in this country.

What happened?
Late last year, Ecuador elected a new president, Rafael Correa, who closely aligned himself with president Hugo Chávez Frias from the Republica Bolivariana de Venezuela (a.k.a. Venezuela), and with president Evo Morales from Bolivia. That fact alone is scary, as both Mr. Chávez and Mr. Morales have made it clear that they see a solution to poverty not in stimulating and formalizing production by the poor and creating opportunities for them to help themselves, but through mass nationalizations of the exploitation of natural resources, redistribution of wealth and other "give-aways". This will certainly help the poor a little bit in the short term, but will leave them without a way to fence for themselves, without an international market that can help them grow, and without a stable, self-sustaining economy in the medium and long term.

The first step that Mr. Correa is taking, comes right from the script of Mr. Chávez: dissolving parliament, and writing out a referendum to form a Constitutional Assembly in charge of rewriting the constitution. This constitution can then be taken as a guideline to take away any incentive the middle class could have to succeed, just like was done in Venezuela.

There is one interesting difference between Venezuela and Ecuador: a few years ago, Ecuador changed their coin unit to be the US Dollar. Although this doesn't mean that Ecuador therefore couldn't restrict foreign imports or dollar-flight, it possibly could dampen inflation a bit, since there is no way for the government to control the actual exchange rate. Inflation will be noticed by higher prices (due to scarcity because of import restrictions), without an accompanying increase of salaries: it's not the economy that grows, it's the articles that become less available. As a result, the poor will get poorer and the rich... well... I doubt that they will wait to take their assets out until Mr. Correa stops them.

There is another fundamental difference between Ecuador and Venezuela: Mr. Chávez can actually afford to be the way he is. As a major oil exporter of the world, the oil dollars that he receives, offset his spending spree up to a point where he feels comfortable giving away oil to the needier around him: Cuba, Haiti, Nicaragua, and... the poor in New York State and Massachusetts in the US! Ecuador, although not as needy as Bolivia, simply can't afford such a splurge.

That is was time to upset the corrupt power-balance of old in Ecuador, that's something to which many people can agree. However, to replace it by something that has proven to be disastrous time and again, simply hurts.

There is a thin silver lining around the cloud: When Mr. Correa's experiment goes awry, the Ecuadoreans have been know to quickly (and sometimes violently) replace their president: the country counted 8 presidents in the last 10 years...

See here and here and here for some related BBCNews stories.

Opportunities for Kiva in Perú

As I must have told all of the 3 people that read this blog on an (ir)regular basis, for the last few months I have been trying to get something going between Kiva and Peruvian MFIs. My report on what I did while I was out there last month, has been long overdue. Well, I'll stop procrastinating: here ya go!

Sometime in late December 2006 (or was it early January), I had the bright idea that I should try to combine my family visit trip to Perú with an attempt to investigate the opportunities to connect any of the existing Perúvian MFIs with Kiva. Since I have absolutely no insight in the fascinating world of international financing (oh wait... I'm a Kiva investor! I am an International Financier!), it took quite some thinking to figure out how to approach this. Well-- business development is business development, whatever you do! So you start talking to the people that do have contacts.
I emailed the MFI officer that had originated several of the loans that I subscribed to in Ecuador, Ing. Luis Crespo of Mifex. He put me in contact with a colleague of his, who has spent many years in microfinancing, a gentleman by the name of Vicente Avalos. We exchanged emails, and we agreed to meet in Lima on Friday Feb. 9, 2007.

We met that afternoon at the San Isidro (Lima) office of his employer, SwissContact, a Swiss NGO that provides technical assistance to microfinance institutes, for about 2.5 hours. I presented him with an extensive slide deck with Kiva's value proposition, which MFI's would be most helped by it, and how to join.

• SwissContact (or Mr. Avalos, I am not sure) is currently providing technical assistance to 3 MFIs throughout Perú: in Cuzco, Ayacucho, and Puno.
• Generally, these are well-established MFIs; one of them is even listed at MixMarket.Org.
• They have well-established procedures, including underwriting procedures. Changing the way they do business will be a hard sell, even if they could save ~7-10% in loan costs.
• They currently are funded through private funds, governmental funds, and Worldbank/IMF loans.
• The average microloan bears an interest of about 17% annual; this is very low compared to alternative loans that are provided to these businesses: an informal lender charges between 5-15% per month! For comparison, current mortgage rates for primary residence mortgages in USD are around 10% annual.
  
• We jointly identified three ways to get Kiva involved in Perú:
• Get an existing, well-established MFI to sign up with Kiva. This would be the slowest of all three possibilities according to Mr. Avalos (at least 6 months-- Hora Peruana?). However, this is the one that Kiva strongly prefers, as it will entail a smooth application process and a running start of the cooperation.
• Get an existing Kiva partner, like Mifex, to expand into Perú. Both Mr. Avalos and Kiva realized that this will be hard: The only real candidate would be Mifex, and their operations are currently limited to Guayaquil, Ecuador. They are already one of the smaller and younger MFIs that Kiva deals with; in short, Kiva wasn't thrilled about the idea, Mr. Avalos wasn't thrilled, and -without asking them- Mifex themselves probably wouldn't be thrilled either.
• Start a new, Kiva-only funded MFI. This would be the easiest and best solution according to Mr. Avalos, who said that he would be able to jump-start this with a number of well-experienced MFI executives. This should cover those regions that are currently under-served by the existing MFIs. He sees this as the quickest path to get Kiva involved in Perú. However, Kiva is currently not able to accept this, for a number of reasons: lack of time and resources to mentor such a new MFI, lack of possibilities to do the necessary due diligence on the operation from the US, etc. Both Ben Elberger and Chelsa Bocci of Kiva told me in no unclear terms: "not now, maybe in a few years or so"

In conclusion, Kiva urged me to tell Vicente Avalos that the easiest way to get an MFI signed up for Kiva is: have them submit an application form. In my latest email to him (a week or so ago), I urged him to actively present the opportunities that are created by Kiva to the MFIs he's working with. The ball is now in his court and I think that, unless he runs with it, this is about as far as it can go. Let's hope he is listening to his president.

National Tardiness Campaign: will it work?

Recently, Perú's president Alan Garcia launched a campaign called "La Hora Sin Demora"(time without delay) against a perceived endemic national (or even transnational) problem: tardiness. Although campaigns like this appear to be popular in Perú, I doubt that ringing a bell at Lima's Plaza de Armas. Begging the Peruvian populus to be on-time ("Hora Inglesa", English Time instead of "Hora Peruana", Peruvian Time which always has a lag of a few hours), will make the country do things any faster or punctual.

Actually, my opinion is that things have progressively gotten better over the last few years. Punctuality is one thing, reliability of business deals and appointments in another. We have visited Perú almost yearly over the last ten years, and lately (hah-no pun intended) things have become more reliable. You can agree on the plumber to visit your residence tomorrow morning, and there's now a reasonable chance that he'll actually show up. You can ask Telefónica for a phone connection, and they'll keep their appointments about as good as Verizon would here in the Northeastern US.

Interestingly, and disappointingly, getting one or more MFI's signed up with Kiva appears not to be part of this deal. With some difficulty, last month I managed to meet a representative of a Swiss NGO that does "technical assistance" to MFIs in Lima. We discussed the possibilities and the advantages of any MFI to get funded by Kiva, and he appeared all enthusiastic about the possibilities. I even followed-up with Kiva, who because they're working at or over capacity signing up new MFIs, really couldn't give any personalized assistance. Unfortunately, things are moving at the speed of "mañana", which means that my estimate is, that my efforts won't have any results until 2008 or so. Simply disappointing.

I hope that president Alan Garcia's campaign will also penetrate in the slow-moving world of Microfinance Banking.

What convinced me to make my latest Kiva.Org loan

I just invested my bimonthly installment of $25 into a cattle and rice farm called Hacienda la Maria, owned by Ivan Romero in Ecuador. What made this one stand apart from all others?

First, I should say that I am overinvested in Ecuador. Initially, I thought about investing in a pulpería in Honduras, mainly because I'd want to invest more in that country. However that one didn't really pass my loose "due diligence" standards: 12-16 months repayment period for a $750 loan means to me that the revenue generated from the venture isn't enough to make a real difference. If you can't pay back a $750 at a rate of $100-$150 per month, then you should think of ways to make more money of a business, or loan more money to drastically expand what you are doing.

So I was hesitant at first to invest another loan in Ecuador. Don't understand me wrong: my initial doubts were solely based on diversification. I think that Mifex is a FANTASTIC MFI, and I have built up a relationship via email with one of their principal loan officers and executives, Luis Crespo.

What pulled me over the brink was the expansiveness of the description. Simply great! There was a section on the geographical and safety risks, the background on why the associations were formed and how they would help guaranteeing repayment and reduce risks, as well as the simple opportunity description. Another factor was, that this business *can* repay $1200 in 7-11 months, and therefore his revenue (increase) will be well in proportions to the loan.

Are there other people putting in these criteria? I heard a rumor about a discussion on this at Pondering Pig's blog, I will have to check that out.

Repayment rates...

Interestingly, my entrepreneurs in Ecuador appear to be paying back faster than the ones in Mexico. I guess to sample is too small to take any statistical conclusion...

Finally - invested again

As I wrote before, I've had quite a lot of troubles finding a new investment opportunity for the second half of January. The offer of Latin American businesses was quite low, often even zero. I even emailed Luis at Mifex to ask if there were new businesses in the pipeline-- there were, he said, and obviously my patience worked out.

There were three businesses in need listed by Mifex:

1. Esperanza Mazon
2. Helen Minota
3. Jenny Cevallos

I chose to go with #3, Jenny Cevallos. Her story was simply the most compelling. I believe that Esperanza Mazon has a good chance of paying back, but her business approach seems too small to me for her to really progress. Also, 6-10 months for such a small amount seems a very slow repayment rate. Helen Minota's business seems good, although I am not sure about how she would run a business as a single mother with three kids. I hope her family will help her out with childcare, as it often happens in Latin America. And Jenny Cevallos, who got my vote, appears to be a serious and savvy business woman. Her husband is supportive and works, she looks very dedicated, and has invested time, effort, and money in her business and store.

Let's see in a few months how things are working out!

More on the same theme...

We passed the 15th of the month a few days ago, and I have been frantically looking for a good Latin American business to invest in to fulfill my promise of "a new business every paycheck". I need to diversify a little, as the only opportunities that are open right now are in Mexico and Ecuador (again!). Not that there is anything against these-- on the contrary, I have become a great fan of Mifex and I think that Luis Crespo c.s. are doing a great job there, and I would encourage everyone to invest there!



However, as discussed in my first blog entry, diversification is the key for a healthy portfolio. I'm really looking forward to invest in a business in Honduras or Nicaragua. Let's hope some get posted soon...

Kiva activities in Latin America

On The Kiva Chronicles blog, a commenter remarks that there are very few Kiva investment opportunities in Latin America. This is true:

• Of the 28 partners that Kiva lists currently, only 5 are from Latin America.
  
  
• Compared to some of the Eastern European partners, they are not very active. I see once in a while a loan appear from Prisma in Honduras (but nothing in Nicaragua), and I see regularly loans from Mifex (Ecuador) and Admic (Mexico). Where are the other MFI's? FVP (Mexico), Fundación Adelante (Honduras), Prisma Nicaragua, where have you gone?
  
  
• Where is the rest of Latin America? I can't imagine that the existing MFI's in Brazil, Guatemala, Perú, Colombia, Bolivia, to name a few, are all set.
  
  
• Are there any other reasons that MFI's cannot or don't want to "hook up" with Kiva? I can think of several reasons why not:
• Currency import and export restrictions (Bolivia, Venezuela, other countries as well probably). I know that exporting US Dollars is prohibitive in Venezuela, where according to local regulations individuals can only take US$10,000 per year out. The process for businesses to apply for a money-export-license is prohibitive as well...
• Increased overhead for micro-loan administration because of Kiva reporting requirements. I don't think that this is a valid argument-- microloans are administration-intensive by nature, due to extra due diligence that is needed due to the lack of collateral. Also, many MFI's have a social chapter (business counseling/advise, assistance, group loan events, etc.) into which Kiva should well fit.
• Access to cheaper funds. Possible if the MFI is backed by a large charitable fund from which it can draw no-cost or very low-cost loans. That'd be a good problem to have, but also-- not very likely.

If anyone has any contacts with MFI's in Latin America (that are not yet Kiva partners), or contacts that could help get contacts, or people that know people that know people (et cetera), please let me know. I'd be more than happy to send an email or two, or make a few phone calls, to put them in touch with the right person at Kiva.

My 5th Kiva loan - Random Thoughts

• Man... this is addictive! Is there such thing as KivAddication? Every time I go out for lunch, go shopping with the family and we spend $25, I think "hmmm.... I could just have funded a micro-enterprise in need with that!". That's a good thing, I hope???
• I started seriously thinking about a diversification strategy. I really only want to invest in Latin American businesses, because that's where I feel closest to. So the issue is to distribute risk.
• Talking about risk, with Kiva, I identified 3 levels of risk (and Kiva isn't too clear about 2 of them.)
• First, there is the well-known risk of non-payment by the borrower. We all know that and take that risk with our eyes open.
• Then, there is the risk caused by the stability of the MFI. If, for any reason the MFi goes out of business while the loan is being repayed, how will Kiva get their money back? How will the borrower continue repayment? I guess we'll be out of luck then... in other words, it may be wise to diversify your investments over multiple MFI's, especially if they're not huge and well-funded institutions
• Last, there is the risk of Kiva going into receivership. Although I try really not to think about that one, it is a factor that should be considered. That risk is very small while Kiva continues to get funded (see for example this blog). and currently there is absolutely no reason to doubt that this will continue to be the case. But what will happen if new loans would ever start to decline, and thereby Kiva's source of income (your gifts and maybe future interest charged on loans to the MFI's) declines? There may be hundreds of thousands of dollars in outstanding loans if that would ever happen. And Kiva is not a bank, therefore you are not FDIC insured of something. I don't think you can do anything about this, except for monitoring Kiva's health as an enterprise and making sure that they don't go under by continuing to fund more loans!
• Matt Flannery puts in a lot of thought into the statistics behind the loan patterns at Kiva. I think that one of the reasons for very quick funding of African loans is, in addition to all the reasons that are mentioned in his blog and its comments, that there is a language barrier for Latin American loans. Take for example this journal entry about Rosa Parra. You really need to speak Spanish to understand what is going on. Seen the number of recommendations it got, I'm glad to see that it was picked up by many people... (BTW-- that story is amazing and very sad--- if I were a lender to that loan, I'd have try to turn my loan into a gift, if at all possible)
  
• Getting back to Matt's speculations, I'd definitely say that I started to check some basic metrics about a business before investing. That has made me a little bit wary of the large loans some Eastern-European/Near Asian borrowers are looking for. My main, completely subjective considerations include:
  
• Can I imaging this business to be profitable?
• Is the loan amount on par with the amount of revenue I think the business will generate?
• Is the loan amount good to invest in the stated objectives?
• Is the amount vs. revenue vs. payback period - ratio good enough? I mean, if you need 12-15 months to pay back a $400 loan, then there is something fundamentally wrong with your business plan...
• How stable is the country? Do I know of some recent news event that may cause super-inflation during the repayment period? Will I lose my money because a coup-d'etat is about to happen, or local violence on the streets will cause my prospect-investment venture to have to close down for extended periods of time?
  
• It is very good to know that quite some due diligence is done by the MFI. I've seen several businesses for which the loan fell through for a number of reasons, even though the Kiva community raised the money. See for example here and here. (Interestingly enough, also some of the borrowers back out of the financing even though they qualified...)