Comments on: Help me avoid being a loan shark.

Question: Help me avoid being a loan shark.

Salvor Hardin — Sun, 21 Jun 2009 07:08:54 -0800

What's the scoop on the interest rates charged by Kiva's microfinance institutions?

I am interested in lending some money via Kiva.org. Kiva has gotten pretty positive press, and the concept makes a lot of sense to me. However, I have heard conflicting and worrying things about the interest rates (averaging around 20%) charged by the regional microfinance institutions that Kiva uses to actually lend the money.

I have heard both that the interest rates are usurious, and also that they are way better than other interest rates that are available in impoverished areas of the world. It seems a bit suspicious that Kiva doesn't tell the lender (as far as I can tell) what the interest rate charged on their loan is. This FAQ from kiva.org seems to explain the high interest rate pretty reasonably, but IANAeconomist, so I feel like I could get suckered. This AskMe question has a bit of a side thread about this topic, but it wasn't very conclusive.

So: What's the real deal about Kiva? Do they suck the life out of poor people with predatory interest rates? Or is it the shining beacon of a new and better way to alleviate poverty? I also welcome any other insight about the pros/cons of kiva.org. Thanks!

By: Salvor Hardin

Salvor Hardin — Sun, 21 Jun 2009 07:25:53 -0800

Correction: I just noticed that Kiva does tell lenders the average interest rate for whichever MFI is handling a particular loan.

By: Pants!

Pants! — Sun, 21 Jun 2009 07:29:38 -0800

Here is a paper on the topic. It suggests that high costs (including costs from a lack of infrastructure) and a developing market for microcredit (which means less competition than in a developed market) are the main problems. You can also see that the issue isn't just with Kiva's partners, but rather it is structural in microcredit.

Imposing interest rate caps would stifle development of microcredit, but you can do your part by using lower credit rates as one of your decision points when choosing who to lend to. If you lend to only those with relatively lower costs in certain regions, it is a small pressure on the higher rate lenders.

By: 0xFCAF

0xFCAF — Sun, 21 Jun 2009 07:51:13 -0800

Just picking a random country off their "Lend" page, Azerbaijan had an inflation rate of 21.8% in 2008. Loaning below the inflation rate in the local currency is just presenting a big fat arbitrage opportunity, not encouraging business growth through responsible investment. Many developing countries have inflation rates that are shockingly high when compared to developed nations. If we capped the interest rate at, say, 20%, there'd be a giant sucking sound as all the financing evaporated because lenders don't really like getting a real return of -1.8% on their money.

By: Salvor Hardin

Salvor Hardin — Sun, 21 Jun 2009 09:01:19 -0800

Pants!: Thanks for that paper - it answers a lot of my questions. And selecting low-interest MFIs is a great idea, although I'm a bit concerned that those institutions might have more fees or something to make up the difference (something that paper mentioned).

OxFCAF: Good point - hadn't thought of that.

Thanks! If anyone happens to know which of the MFIs that kiva.org deals with are the most socially responsible in general, I'd really like to know. I guess I'll try to go with the ones with the lowest rates.

By: SamuelBowman

SamuelBowman — Sun, 21 Jun 2009 09:30:03 -0800

This article by Tim Harford may be interesting to you - his main point is that, as bad as a 100% APR microloan might sound, the alternatives may be far, far worse. What's usurious to people used to 4% APR loans might be a huge blessing to people used to loans compounding daily, backed up by far more unscrupulous sharks than Kiva's MFIs.

By: Pants!

Pants! — Sun, 21 Jun 2009 10:01:04 -0800

Good point about fees. It may be worth pressing Kiva to disclose fee and deposit policies about the lenders.

By: biffa

biffa — Sun, 21 Jun 2009 10:11:27 -0800

Hi Salvador, as you seem to have an answer to your question I hope you won't mind me dropping in an invite/reminder of the Metafilter Team on Kiva, you're welcome to join up!

By: Salvor Hardin

Salvor Hardin — Sun, 21 Jun 2009 10:37:10 -0800

biffa: Not at all - thanks for the invite - I didn't know Metafilter was on Kiva! Is there anything Metafilter cannot do?!

By: mulligan

mulligan — Sun, 21 Jun 2009 10:43:20 -0800

I don't understand, isn't the lender the guy in the developed country? Why is the MFI charging interest on money that isn't theirs? Aren't they just distributing the money?

By: Salvor Hardin

Salvor Hardin — Sun, 21 Jun 2009 11:27:58 -0800

mulligan: Yes, but the way Kiva works is the regional MFI keeps the interest, in return for coordinating the loan process. When you lend on Kiva, you just get the principal back (most of the time), and the MFIs get the interest (in return for coordinating the lending and repayment process).

The way Kiva works (as I understand it) is as follows:
1. Entrepreneur asks for loan from one of Kiva's regional MFIs
2. Kiva posts loan request on Kiva.org
3. Lender gives Kiva money
4. Kiva gives the money (100% of it) to regional MFI
5. MFI gives the money to the entrepreneur and charges interest
6. Entrepreneur gives money back to MFI (98% of the time)
7. MFI gives money back to Kiva
8. Kiva gives you your money back (or you reinvest it)

It's steps 5 and 6 that make me nervous that I might be unwittingly assisting in the usurious exploitation of impoverished people. But these answers have reassured me somewhat, so I think I'll go ahead and join the Metafilter Kiva team and try loaning some money.