What’s the point of Kiva?
23 January 2010 at 07:00 adamkb 12 comments
By Adam Kemmis Betty, KF10 Bolivia
CGAP’s annual Microfinance Funder Survey shows us that Kiva’s impact in financial terms upon the microfinance industry is – to put it politely – tiny. In fact, the combined total of institutional and individual investors, including pension funds, commercial banks and online lending platforms such as Kiva, only amounted to 7% of total funding for the microfinance industry in 2008. The big players are still development banks (such as the World Bank) and development agencies (such as USAID). As a Kiva lender, I found this rather disheartening.
So what’s the point? One view is that every dollar still counts. Particularly since the global financial crisis has restricted the flow of credit to microfinance institutions around the world, another dollar of available financing means another dollar lent (this argument was less valid in 2007 and earlier, when cheap credit was readily available). What’s more, although still relatively small, Kiva is growing fast (see chart), even relative to the industry: it’s not inconceivable that ten years down the line online lending will make up a significant slice of the microfinance pie.
Kiva's growth since 2006
But there are also a couple of reasons why Kiva punches above its weight. On the borrowing side, Kiva can have a substantial impact on individual microfinance institutions (MFIs). The 0% interest rate at which Kiva lends can help an MFI manage its costs, perhaps enabling it to reach borrower segments (such as rural borrowers) that it was previously unable to cover. Kiva is more risk tolerant than larger international financing agencies, and can serve as a stepping stone for an MFI seeking broader access to funds: a risk review from Kiva may give confidence to a larger investor. Kiva can also serve to publicise the work that the MFI does, which in turn might help them find additional financing.
On the lending side, Kiva raises awareness of microfinance around the world (but most notably in the US and Canada). Kiva estimated in 2008 that 36% of lenders had not heard of microfinance prior to using the site, and that the majority of other lenders had little prior knowledge of the sector. Through Kiva, lenders learn not only about microfinance but also about the poverty that it seeks to tackle and the countries where it’s at work. Building a constituency in North America educated in microfinance and international development issues could have big – although rather to measure – knock-on effects, particularly in terms of public policy.
So, we can all breathe a deep sigh of relief, safe in the knowledge that we’re changing the world after all. Well, discuss.
In the meantime, make a loan here.
Entry filed under: All, KF10 (Kiva Fellows 10th Class). Tags: .
1. Adam Kemmis Betty | 4 February 2010 at 10:25
Hi Rodrigo, thanks for the follow-up comment.
The point which Rosenberg makes is fair: the impact of microcredit on a poor person´s life is less than basic education or health services, but it is, on the whole, much cheaper to provide.
However, in some ways the comparison is a false one. Microfinance in developing countries is, for the most part, funded by international development banks and development agencies. Education and health services are, for the most part, funded by the state, but in many cases also receive support from international donors.
To go back to my earlier point, I don´t believe the danger is that developing country governments start funding microfinance as an explicit alternative to basic services – I certainly know of no such cases. On the other hand, it is the case that development banks and donors often face a choice between funding microfinance and funding, say, health and education projects. I think that´s where the tradeoff lies.
2. Rodrigo | 29 January 2010 at 06:59
Hello Adam, thank you very much for your answer. In my opinion, the case of Bolivia is special because the Evo Morales’ government is really convinced of how important it is to make Education and Health accessible to the poorest. Unfortunately, it is not the case for many of other Latin American Governments, more concerned about following the strict orders dictated from the IMF about public deficit and public investment.
Actually, I expressed my opinion after reading this interesting article by Richard Rosenberg, CGAP adviser. http://www.cgap.org/gm/document-1.9.41443/FN59.pdf
If you have some time, please tell me how you would interpret these last two paragraphs. For me the author considers that it is much cheaper for a given State that private microfinance institutions take in charge the work that should be done by Public Institutions.
3. Rodrigo | 29 January 2010 at 07:01
Sorry, these are the two paragraphs I was talking about:
“Based on what we know now, it seems unlikely
that a year of microlending helps poor people
as much as a year of girls’ primary education (for
instance). The true advantage of microfinance
is not that each “dose” is more powerful,
but rather that each dose costs much less
in subsidies. Social programs like primary
education and health care usually require large
continuing subsidies, using up scarce tax dollars
year after year. Microfinance is different: when it
is done right, relatively small up-front subsidies
lead to permanent institutions that can continue
providing services year after year with no further
subsidy needed, and can expand those services
to reach many millions of low-income clients.
For instance, BancoSol in Bolivia represents a
few million dollars of donor subsidies in the mid-
1990s that turned into a loan portfolio of over
$200 million and services for over 300,000 active
savers and borrowers by the end of 2008, funded
almost entirely from commercial sources. This is
not an isolated exception. Among microfinance
providers reporting to MIX Market, the ones
that are profitable and need no further subsidies
already account for 71 percent of all the clients,
and MFIs that are close to profitability account
for another 22 percent.”
4. Rodrigo | 26 January 2010 at 11:20
Ric, I don’t what you are talking about
On the other hand, I would like to know the point of view of someone from Kiva about what I exposed yesterday.
5. Adam Kemmis Betty | 29 January 2010 at 06:24
Rodrigo, this isn´t an official Kiva view, but it´s mine on the points you raised.
“if there is not enough control and transparency injustice and corruption are very likely to appear” – absolutely true, this is a concern regarding any institution dealing with money, and the environments that MFIs work in often make them more vulnerable.
For this reason transparency is an issue that MFIs, funders and regulators scrutinise closely and are constantly working to improve. Kiva, for example, carries out a regular borrower verification process with each of its MFI partners, visiting borrowers in person to confirm that no fraud has taken place.
On your point regarding governments cutting back on subsidies for health and education, I´m not sure if I´m agree. Few MFIs directly provide heatlh and education services (there are exceptions, such as Pro Mujer Bolivia), so it would be hard for a government to justify cutbacks on those grounds. Bolivia, one of the most developed microfinance markets in Latin America, recently increased state investment in education substantially.
Having said that, I agree that there is a risk that international development agencies and development banks put too much faith in microfinance as a tool for development. There are many segments of the population that microfinance doesn´t – and can´t – reach, and many challenges that it cannot tackle. It is important to remember that it is one of many tools for tackling international poverty.
6. Ric Rucker | 25 January 2010 at 07:37
I also believe in giving back from sometime now like Paul Newman with Newman’s Own. Since I have started on this journey I have up to 15 patents now on a New Concept on Ice Chest coolers. When ever I get to the next level my intentions along with a ice and a water company would be part of team to give back in a big way….but there is a problem every since the day I came back from China after selling everything I owned to introduce the first product I could not find the proper funding to launch my company in billion dollar industry which I only have 3 competitors. One of my church leaders ask me to come to ask for assistance and maybe find the help that we need to get to the next level.
7. Rodrigo | 25 January 2010 at 02:02
I agree that every dollar counts, so Kiva’s work is quite important. Still, I have several doubts about the impact of microfinancing. I am afraid that microfinancing can be used by some governments or local institutions to cut down on education and health subsidies, since it is private MFIs who are doing the job for them.
Besides, if there is not enough control and transparency injustice and corruption are very likely to appear, since it will be local MFIs who decide who’s getting the money and who is not, and how it will be reimbursed.
Are we really helping people to get out of poverty or are we in a way just feeding an unfair system so that it perpetuates eternally?
Despite these doubts I still think microfinance is a great idea, but we should be really careful and critic against ourselves.
8. gina giannasi | 24 January 2010 at 22:15
I will never understand any kind of finance, but I do know what it is like to need a little help with money to make a better life. I am a pensioner now and I feel Kiva is worthwhile because I can help someone I will never know improve their prospects in life. True I get more out of it by feeling I am helping…but it is nice to know their are so many caring people in the world helping battlers, regardless of skin, religion, or culture. Thank you KIVA for making the world a better place
9. Howard Zugman | 24 January 2010 at 05:44
Hi Adam,
Thanks for the incisive post. Perhaps the main value of Kiva is, and may always be, not the total amount of loans financed (which is already impressive) but the DETAILED awareness of worldwide poverty gained by the non-impoverished and the ability confered to “do something about it”. The fact that Kiva dollars may “dig a little deeper into the poverty situation” than other loaners is also a very large plus.
An additional benefit might be that exposure to the Kiva experieince would help some of us to realize how darned lucky we are. Perhaps we will learn that say, being stuck in traffic doesn’t rank up there with having no safe drinking water as far as problems go.
10. RaviG | 22 January 2010 at 19:22
Excellent analysis. Kiva’s truly pioneered online lending. Thanks Adam.
11. JD Bergeron | 22 January 2010 at 09:15
Great post, Adam.
12. sidetrips | 22 January 2010 at 07:47
Some crops are not harvested in the same season that the plants sprout from seed. Some plants need two or more seasons before flowering. Some trees don’t bear fruit for several years, and only after careful cultivation. While we wait for a harvest, we can plant more seeds, which produce more seeds to plant. But we plant and cultivate because it is worthwhile to us eventually.