She was staring at the screen with a blank expression. Never had she felt so directionless and utterly disenchanted. When he finally arrived home, she did not even notice until he bowed down to kiss the top of her head.
BILL: Hey, what are you looking at there?
PENNEY: Huh? Oh, this? Just the most horrible news ever.
BILL: What? What happened?
PENNEY: Look at this article by the New York Times. It’s an article on Kiva.
BILL: Oh, really? Seems like more people are going to become lenders like us then. I mean with all this new exposure. How are our little entrepreneurs doing anyway?
PENNEY: That’s just it. This article is saying that the lenders like us are actually not lending directly to the local entrepreneurs. It is an “illusion” they call it.
BILL: Wait, so who is getting our money? I mean if it is not going to the taxi driver or clothes maker, then who is it going to? This is starting to sound fishy.
PENNEY: Well apparently the money is going to the field partners or local Microfinance institutions. And then they are the ones responsible for making the repayment.
BILL: The goat herder never sees the money?
PENNEY: No they still get the much needed loan but—
BILL: Okay, I am going to have to sit down for this cause I’m not following. Maybe you need to go step by step.
PENNEY: Well supposedly, lenders like us first look at the pictures on Kiva and we decide to loan money to a particular person on the other side of the world. Kiva takes the money from all the lenders and give it to the field partners—
BILL: These are the Microfinance institutions?
PENNEY: Uh huh. Then the MFI’s give it to the goat herder as you call them. Then the goat herder repays the loan to the MFI then the MFI sends the money to Kiva and they redistribute the repayments to all the lenders.
BILL: Yeah I thought that that was the way it worked.
PENNEY: So did I.
BILL: So where is the illusion?
PENNEY: Well apparently the MFI’s give out the loans then they post pictures for Kiva and that is what we see when we choose who to loan out to.
BILL: Oh so the goat herder already has the loan and the MFI is just trying to get funding to cover it?
PENNEY: Exactly.
BILL: So the money we lend actually goes to the MFI and not the individual entrepreneur.
PENNEY: Yup.
BILL: Well that kinda sucks.
PENNEY: I know.
BILL: I was willing to put up with the small, miniscule chance of losing part or all of my loan cause I thought that we were directly helping people. It felt like a human connection, you know?
PENNEY: Me too.
BILL: I mean how is Kiva different now from those other sites you were talking about like that Ebay one?
PENNEY: Microplace.
BILL: Yeah that one. I mean that invests directly into the MFI’s right?
PENNEY: Yup.
BILL: And didn’t you mention Microplace also gave you a small return on your investments?
PENNEY: Yes it does.
BILL: So why not switch over to that one then?
PENNEY: Well that one is not perfect either. They manage to give back returns because they charge higher interest rates on the local entrepreneurs. They carry that extra burden.
BILL: Well that sucks. There needs to be away to get rid of all these intermediaries and really establish a human to human connection, you know.
PENNEY: Well, according to what Matt Flannery said and David Roodman’s thoughts on the whole thing, establishing that true human connection is going to be really difficult especially with an organization as big as Kiva.
BILL: Really difficult…but not impossible right?? If there was only a way…
PENNEY: I know! Maybe we could think of something.
BILL: Man, now I know why you were just staring into the distance when I got here.
PENNEY: Yeah Kiva has done a lot of good so I don’t want to really abandon it but then again I am craving that connection too. I don’t really care about return on investment or default rates. I just want to help directly.
BILL: Me too. Me too.
If you enjoyed this post, make sure you subscribe to our RSS feed!
Related Posts:
- Money Talks–CHAPTER 5 (SEEK YE THE TRUTH)
- Money Talks–CHAPTER 2 (WHY KIVA?)
- Money Talks–CHAPTER 4 (HAVE YOUR CAKE AND EAT IT, TOO)
I need to shape up...
Kiva: The Play | David Roodman's Microfinance Open Book Blog on November 13, 2009
[...] the blog post, scanned the tweets, digested the New York Times story…now see the play. Or read it anyway: BILL: Hey, what are you looking at [...]
Tim Ogden on November 13, 2009
I think your post encapsulates a bit part of the issue with all charities who purport to offer a direct connection. They do so because donors demand it.
But let me ask: how often do you take advantage of the opportunity to give directly and establish a connection by giving $20 to the guy standing at the corner with the cardboard sign saying, “Will Work for Food”?
I’m betting that you don’t — and for very good reason. You believe that to actually help that person you should give the money to a responsible intermediary like a homeless shelter that will do the research to understand this person’s situation, and ensure the money you give is actually used in a responsible way.
So if you would only give to a responsible intermediary in order to help someone on the street outside your home, why do you want to do away with intermediaries between you and a person on the other side of the world whose circumstances you don’t understand at all?
I just don’t get it.
karl on November 16, 2009
i think that the backlash is mostly the product of people feeling like they were misinformed. after all, kiva claimed to enable lenders to directly lend to a particular entrepreneur. now it comes out that that is very unlikely because of the model’s structure. many feel that they were mislead and are looking for drastic changes (eg, elimination of intermediaries) but i concede that MFIs are necessary in order to get a better picture. the question becomes: how many MFIs or steps do we really need between the lender and entrepreneur?
ZM on November 16, 2009
As long as money gets to where it’s needed, does it matter how it gets there?
mike on November 17, 2009
@ZM – According to the reactions to the New York Times Kiva article, apparently how that money is funneled DOES indeed matter. Personally, as long as I am able to help out, I don’t really care too much about that peer-to-peer connection. For me, that relationship is/was a bonus that Kiva provided.
saimon on November 25, 2009
very interesting dicussion and very informative.
dana on December 3, 2009
Hi Karl,
My name is Dana Schmidt and I work for MicroPlace. Your post is intriguing and I agree with some of your points (MFIs are necessary, value of the peer-to-peer connection, etc.) but wanted to clarify a few things. It is true that in the MicroPlace model you make an investment in the microfinance organization, not the end borrower. However, returns on MicroPlace are not dictated by or made possible because of higher borrower interest rates. Let me explain how it works and why we think this model is necessary for the billion working poor we are trying to help.
The industry challenge: One billion of the world’s working poor need access to credit. $300 billion is needed to provide those services. Philanthropy and government subsidies will be unable to meet that demand. A new channel of funds is needed to service those people. How do we solve that problem? In the US alone in 2008, $2.7 trillion was invested in socially responsible causes. A fraction of those dollars funneled into microfinance could make a huge difference. The problem is that while wealthy individuals and large institutions have a way to make investments in microfinance, ordinary folks like you and I don’t. And if we need to meet this $300 billion gap, it behooves us to create channels by which money can flow scalably and sustainably into the industry. That is what MicroPlace is about; we are pioneering a way for “regular folks” to make investments in the world’s working poor.
The MicroPlace solution: We agree that microfinance institutions are important partners in this process because they are the people on the ground with the relationships, expertise and information on the borrowers who need their services. MFIs need to raise money so they can provide financial services to their clients. They can borrow from local banks, development agencies or international lenders like Calvert Foundation, who raise money on MicroPlace through the sale of investments to individuals like you so they can make loans to select MFIs. The return you make comes out of the interest they charge to those organizations for making that loan.
However, the interest rate Calvert needs to charge the MFI also depends on Calvert’s own cost of capital, which is dictated by many factors, including how much donation capital they get, what their other sources of bank or other borrowing are, their overhead, etc. The cost of capital among the five issuers on our site even varies a good bit. This is also true at the microfinance organization level, they may have various sources of capital other than Calvert, so it’s not true that a one-for-one correlation exists between the rate they pay Calvert and the rate they need to charge to borrowers.
That said, issuers like Calvert keep a keen eye on borrower interest rates and ensure they are in keeping with the rates in that country or region. Transparency is crucial in microfinance, and borrower interest rates are at the top of the list. In addition, microfinance institutions are increasingly offering other services such as financial education, savings accounts, remittances, insurance – all much needed services by these types of borrowers! That also factors into borrower costs. What Kiva and MicroPlace are attempting to do is lower the cost at which microfinance organizations have to borrow money so that they can ultimately pass these savings on to clients.
MicroPlace’s focus is about using your investment portfolio for social good. While no system is perfect, we feel it is the most effective way to solve poverty and help millions of hard working poor people meet their basic needs in life and move from survival to planning for the future. We believe this is truly the “human connection.”
Anon on December 4, 2009
Well said Dana.
The Calvert Foundation is involved in a business relationship with an MFI, and therefore has money tied to that institution. They (Calvert) have ever incentive to make sure they get their loan to the MFI paid back, because they owe money to their investors (as well as their bill collectors). One of the most important ways to monitor the viability of their loan to the MFI is the borrower interest rates!
If the rates are higher than the market the MFI is operating, than this sends many clear messages to Calvert: 1) the borrower repayment rate may increase thereby placing an added strain on the MFI and their repayment; 2) the borrowers will leave that MFI, as there are few markets where there does not exist several institutions for the borrowers to switch between, which places Calvert’s loan the MFI in jeopardy; and finally 3) it can reveal operational/management inefficiencies that the MFI is trying to past the cost burden onto the borrower rather than make the in-house corrections, which also places the relationship between the MFI and Calvert in jeopardy.
Mike on December 5, 2009
Thank you both for your response. I am not really sure where I heard or read it, but thank you for clarifying how the Microplace model works and how lenders earn an interest from their investments. We look forward to learning more about both Microplace and the Calvert foundation. I truly admire what both of these organizations are trying to achieve.
While it’s true that there are many models out there and there will never be a perfect solution, in the end, organizations such as Mircoplace and Kiva all have the same goal in mind: poverty alleviation. In the future, I too, can only hope to contribute to this end goal.