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.

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.

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.

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...

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...)