The Influence of Choice — Could P2P Funding Introduce Bias?
14 May 2010 at 05:00 Jeremy Gordon 6 comments
By Jeremy Gordon, KF11, Kenya
Kiva’s success is exciting. A door is now open allowing us to reach those living in places we can’t easily visit in person and to become personally involved in micro-finance. Making my first loan on Kiva felt a bit like a rediscovery of the internet. International Skype conversations were impressive, but this was something novel—Kiva allowed me to lend my own resources to help achieve someone else’s goal, and I was hooked.
Because this sort of P2P lending is still new, we can’t yet know the full extent of its impact on the microfinance ecosystem; even less can we predict the role it will play five or 20 years into the future. I think it’s important to start a conversation, and to consider what influence we, as lenders, may have.
In some ways, the Kiva lending model is a free market susceptible to the same influences of supply and demand as any other. Perhaps certain loans (maybe agricultural loans to rural farmers) are consistently chosen by lenders more often than others (say, maintenance loans to urban taxi drivers). If loans of the latter type take significantly longer to fund on Kiva’s website or are more likely to expire before they’re completed, a flexible market will adapt, and a Kiva partner may choose to post other loans that tend to fund more quickly or reliably.
I don’t have the research to describe what, if any, bias Kiva lenders exhibit in selecting their loans, but there’s little reason to believe our choices are random. Transparency, after all, and the ability to choose which individual borrower we contribute our loans to are both central to Kiva’s model.
Currently, it seems unlikley that the preference of lenders will influence the selection of loan recipients by Kiva’s partners. Because of a policy that limits Kiva’s contribution to 30% of an MFI’s funding, partners are free to simply rotate the selection of their portfolio posted to the website if they find that some of their loans fund better than others. That said, imagine a not so distant future where P2P lending is well-established and popular, and some MFI’s rely on several such sources to fund the majority of their portfolio (even today, some MFIs receive funding from both Kiva and a similar platform, MicroPlace). Under limited resources, when such an MFI considers its next batch of loan applicants, might it not consider the data collected from its past experience showing that certain loans are more popular than others? Might they not feel some pressure to reject Halima’s loan for a juice freezer (or Ali’s more controversial charcoal loan), for fear it will not fund through Kiva and their other P2P funding sources? Might western-world fads or biases translate into shifts in the availability of loans in certain industries, or to specific demographics? Is it possible, at some point, that entrepreneurs may be compelled (or even encouraged) to transition into a business more popular to western lenders?
I fully believe organizations like Kiva have a great opportunity to bring interest, energy, and capital to the microfinance industry, but I think some of these questions warrant dialogue. How much influence, as lenders, should we have?
Jeremy is a Kiva Fellow working with Juhudi Kilimo in Nairobi, and Yehu Microfinance in Mombasa. He recently discovered the subtle difference between two Kenyan staples: mandazi and mahambri.
Tell us what you think! We love feedback from the Kiva community.
Lend to a Kiva entrepreneur.
Volunteer with Kiva, or apply to join the next class of Kiva Fellows.
Entry filed under: blogsherpa, Kenya, KF11 (Kiva Fellows 11th Class). Tags: blogsherpa, Jeremy Gordon, KF11, Kiva, microfinance.
1. Chernicoff | 17 May 2010 at 13:47
Jeremy,
It makes a lot of sense to think of microfinance markets in the same terms we think of other markets–it has the benefits, it might have the same dangers. Perhaps it makes more sense than usual at the present moment to consider what happens when faraway investors make lending decisions based on imperfect information, given the events of the last year or two. (Couldn’t bubbles arise–and burst–in the microfinance markets? I don’t see why not, though it makes my head hurt.)
I wonder what your opinion is, personally, about whether a microfinance market is more or less prone to irrationality than a more traditional one. Do you think a prospective lender is more likely to err when faced with, say, a Kiva-esque series of similar candidates best distinguished by photograph (I think Fehmeen’s right on on that one, btw), or a more traditional series of investments and all the concommitant numbers? I don’t know whether I think people are more likely to do something silly because of humans’ innate reaction to faces, or our innate assumption that we’re smarter than we are about interpreting data.
Anyway, this is interesting as hell. Thanks for posting.
Chernicoff
2. Julia | 14 May 2010 at 13:52
Hi Fehmeen,
I was thinking about that, too, because in some countries there are very rich and very poor people and you unfortunately have to trust the MFI to find the people who are really in need. I think it is just not possible to post more detailed information about borrowers because Kiva is an open platform for this person´s neighbor to see. When I detected a MFI in the Dominican Republic recently I read that someone lives in a slum in a “structure” and I decided that my money would have a good impact there. I am subjective.
I recently saw on television that people in Kenya who cannot pay their hospital bills are taken prisoner by the hospital and stay there for months while the bill increases. I feel safer if my money goes to a person and not to a public project because I cannot go there and check the books and what they are doing regularly. Schools and hospitals are needed of course but I am not happy if e.g. my government finances something and does not check on the outcome.
Julia
3. Fehmeen | 15 May 2010 at 10:23
You’re right about the trust issue involved in development projects. A lot of money ends up in everyone’s pockets and there isn’t really a way to check that by individuals. Perhaps an MFI’s involvement in such projects would improve their transparency to some extent
4. Julia | 14 May 2010 at 13:29
Hi Jeremy,
look at the lenders: we have nothing in common but that we are able and willing to lend at least 25 Dollars. I believe there is a lender out there for everyone if Kiva is big enough. As I hope that in the longrun Kiva borrowers will become lenders and that today lenders will advertise Kiva to their friends I see a big Kiva in 20 years
Why do you think that some undemocratically imposed future leadership of Kiva would make better choices than the lenders on Kiva given they are provided with as much information as is available?
But I understand your concern of course. Some borrower profiles have remarks on them like “The whole family will benefit from his work” because the clerk in the MFI knows that empowering women is many lenders´ concern.
But as long as the MFI is honest with us I think we can live with some kind of advertising being focused on us. Our influence is limited to choosing between what is offered anyway and I do not think that our help will make people choose another type of business if the customer demand in that country is another and other businesses require more funding. If poor men in Lebanon tend to work as painters and the easiest thing for poor farmers in Cambodia is to raise a pig my only choice is if I help them or not.
I think the work of Kiva fellows like you is of great importance because you provide the information our decisions are based on besides what we already know ourselves. With great power comes great responsibility
Julia
5. Jeremy Gordon | 16 May 2010 at 23:48
Hi Julia,
I appreciate your thoughtful response. I also share your optimism that most every client on Kiva can be matched with a group of lenders interested in supporting their loan. I do think the phenomenon I’m proposing will only be relevant in the long-term future of P2P lending. I don’t believe that Kiva lenders are making bad decisions by any means, I think we, as lenders, are doing exactly as we should be: choosing whom to support based on the information we have available.
I’m suggesting only that we consider the influences our preferences may have in aggregate. Perhaps this influence is justified (as justified as, for example, choosing not to buy shirts manufactured in China), but I think it’s important to acknowledge either way.
Thanks,
Jeremy
6. Fehmeen | 14 May 2010 at 13:21
As lenders, we may not be able to make informed decisions about who gets to receives our money. For instance, if I were to look for the right person, I’d be very interested in knowing the current economic and social condition of the potential borrower, in detail, so I can go for maximum impact. At the same time, other website, similar to Kiva, function on a peer-to-project basis, which may allow us to gauge the long term impact of loans/donations if projects such as school buildings, water filter plants, or hospitals arise. This is all for the objective lender.
Subjective lenders may operate differently. The photo of prospective clients may have a lot of power…