Is a Kiva loan really interest free?
1 June 2009
By Zev Lowe, KF 8 Indonesia
The US dollar has recently risen significantly against many currencies. When I arrived in Bali to begin my Kiva Fellowship with DINARI Foundation, I received 10,295 Indonesian Rupiah (IDR) for each of my US dollars. This is 10% higher than a year ago, when the US dollar was worth 9,350 IDR.
How does this fluctuation in exchange rates affect Kiva lenders, partners, and borrowers? Does this mean that an Indonesian farmer or food vendor is left having to bear the burden of the strengthening dollar?
Kiva Field Partners deal with currency risk on Kiva loans
As a Kiva lender, your money gets sent in US dollars to a Kiva field partner, like the one with which I am working, DINARI Foundation, in Bali, Indonesia. Among other things, Kiva field partners work tirelessly to examine and approve loan applications, go into the field to meet borrowers and collect repayment, and often provide non-financial assistance like education and sometimes healthcare. The Kiva field partner exchanges the funds into local currency and passes them along to the Kiva borrower. The Kiva field partner then converts the borrower’s repayments into US dollars and sends back to Kiva.
This leaves Kiva field partners with the potential to lose quite a large sum of money as currencies fluctuate. To illustrate, the blue line in the graph below shows you how many Rupiahs you could get for 1 US dollar at any point in the last year. I’ve sketched out the implications of the exchange rate on an imaginary a $1000 interest-free loan. The repayments should be in 10 equal installments of $100, but as you can see, if you operate in Indonesian Rupiah, the amounts are anything but equal, ranging from 910,000 IDR to 1,210,000 IDR.
By the time May rolls around, the initial amount disbursed ten months prior in local currency (9,150,000 IDR) is no longer worth a thousand US dollars — rather, given current exchange rates, it is worth only 871 US dollars. Due to currency fluctuations, the entity responsible for this imaginary loan will be paying what amounts to an 18% premium over 10 months. And that’s on an interest-free loan!
I’m glad that Kiva borrowers are currently completely insulated from the reality of foreign exchange movements. But this leaves Kiva field partners paying thousands of dollars every month to compensate for currency fluctuations. For those of you who are finance people, larger Kiva field partners that operate in liquid currencies can hedge their foreign exchange exposure. But this still leaves smaller Kiva field partners extremely vulnerable.
As a Kiva lender, with so many currencies devaluing against a strong dollar, I find myself asking what more I can do as a lender and as a Kiva Fellow so that the responsibility of foreign exchange risk does not land solely on the shoulders of our dedicated and hardworking Kiva field partners.
***
Zev Lowe started work at DINARI Foundation today. He recently completed his MBA at ESADE Business School in Barcelona, Spain. Zev loves finance, technology, Aikido and long walks on the beach.
Entry Filed under: Dian Bhuana Lestari Foundation (Dinari), Indonesia, KF8 (Kiva Fellows 8th Class), blogsherpa. Tags: Bali, barcelona, blogsherpa, currency risk, developing countries, economic crisis, esade, Foreign exchange hedging, Indonesia, Kiva, Kiva Fellows, microfinance, spain.
20 Comments Add your own
Leave a Comment
Some HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <pre> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
Trackback this post | Subscribe to the comments via RSS Feed
RSS - Posts
1. Suzy Marinkovich | 1 June 2009 at 13:58
zev, this is an AWESOME post. great job and i love the graph. i will be sharing this!
2. Alak | 1 June 2009 at 15:01
http://www.socialedge.org/blogs/beyond-good-intentions/archive/2009/05/25/micro-lending
This video, indicates the Kiva Loans come with enormous interest rates. How is that explained?
3. Brett Dobbs | 2 June 2009 at 04:20
Zev – I used this post to explain to potential partners at my MFI the trouble with exchange rates. Super helpful. Thank you!
4. The Lemonade Stand | What in the world is Zev up to? | 3 June 2009 at 04:47
[...] work here falls into three categories — finance (forex hedging and cash flow management), development (conducting training sessions, working on IT and IS [...]
5. Unilove | 3 June 2009 at 23:30
I find it interesting that in the initial powerpoint presentation that Kiva showed us lenders, the potential currency risk was characterized very differently.
Informative post, thank you.
6. premal shah | 4 June 2009 at 07:47
great post zev!
7. alan | 4 June 2009 at 10:49
Sorry to say, but your analysis is a little simplistic. Yes, there is some risk to the lending partners that they might lose on currency fluctuations, however there is also the possiblity that they will gain. What if your scenario were reversed, in which the partner borrows when the US Dollar is high, and pays back when it is low? Furthermore, the system of net billing presumably helps to smooth out the fluctuations. I would assume that the lending partners factor the currency risk into the interest that they charge the entrepreneurs, and if they are astute they can probably find creative ways to minimize the risk or even make it benefit them (borrowing high and paying back low).
Currency also enters the equation with lenders. For example, my home currency has been rising in recent months against the US dollar, which means that it costs me less and less each month to purchase the same credit towards making loans. But if I choose to receive my repayments back, rather than relending, I will also lose on the currency exchange. Such is life. (Incidentally, I look forward to repayments so I can recycle the money by relending.)
But to return to my main point, to characterize currency risk as “interest” is over-simplistic.
8. Jan & John | 6 June 2009 at 08:53
Thank you Zev. This subject is *hot* at KivaFriends forum. And the more they talk, the more confused I get
I wait patiently to see how this falls out and how the lenders can help. Thanks for the graphs, it’s a difficult subject. We all want what is best for the borrowers. jan
9. Guide Me Green | 7 June 2009 at 07:22
It is the MFI that has to deal with the currency fluctuations and create strategys to deal with this. from the UK I lend $25 I recieve $25 back (providing no default)
As the money is lent in local currencies on the ground with an interest rate then providing the exchange rate or inflation rate does not change dramaticaly such as in Zimbabwe then the lender in the field would pay back the same with any changes absorbded by the MFI
Thats my interpretation anyway!
10. Judy | 9 June 2009 at 11:23
Lenders who pool their money with no interest attached are doing their part to make microloans viable.
11. Leslie | 12 June 2009 at 17:04
I’m confused…..we as lenders receive no interest, so for us, it’s interest free. However, I thought the MFIs receive interest from the borrowers, so for the people we lend to, it’s NOT interest free. Am I wrong? Did I miss a memo somewhere along the way?
12. 15 Ways to Use Social Media for #FindingTheGood | 26 June 2009 at 12:54
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
13. 15 Ways to Use Social Media for #FindingTheGood | TechDozer.Com | 26 June 2009 at 13:02
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
14. 15 Ways to Use Social Media for #FindingTheGood | HyipLife.com | 26 June 2009 at 13:05
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
15. Seo-Marketing-Tips - 15 Ways to Use Social Media for #FindingTheGood | 26 June 2009 at 20:32
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
16. 15 Ways to Use Social Media for #FindingTheGood | NASZAKLASA | 27 June 2009 at 03:08
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
17. TechnoRush » 15 Ways to Use Social Media for #FindingTheGood | 27 June 2009 at 08:30
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
18. 15 Ways to Use Social Media for #FindingTheGood « Internet Marketing KB | 27 June 2009 at 11:30
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
19. 15 Ways to Use Social Media for #FindingTheGood @ cash tower | 17 August 2009 at 16:38
[...] ways, Kiva can be thought of as a way to donate the same money, over and over again. (Note that some people have argued that fluctuating exchange rates actually add a sort of pseudo-interest to the [...]
20. free cars manuals | 3 November 2009 at 03:59
Keep us posting, good work