37

Or, at least, has a questionable business model?

Kiva is a website/organization that allows private persons to give micro-loans out to (very) small businesses in developing countries.

Their idea seems rather nice to me, however there is quite a sprawling discussion on this forum at scam.com where people argue back and forth that Kiva is a scam because while you loan your money out interest free, the microlenders charge relatively high interest rates. The discussion becomes quite vitriolic and certainly doesn't meet the standards of skeptical rigor, so I thought I ask here:

Is Kiva a scam or operates in a deceiving way?

  • 3
    Whether or not a business model is ethically questionable is a subjective question and therefore has no place on this website. – Christian May 22 '11 at 22:19
  • 4
    Whether or not it is a scam is clearly not subjective. I removed the "questionable", though. – Lagerbaer May 22 '11 at 22:21
  • I think you're mistaking scam and usury. – vartec Jul 24 '12 at 15:17
36

It's not a scam unless they are blatantly lying about something. Kiva itself doesn't charge interest rate instead their "field partners" do, which seem to be independent organizations that Kiva is partnering with. Here's information directly from their website:

The Field Partner collects repayments from Kiva entrepreneurs as well as any interest due and lets Kiva know if a repayment was not made as scheduled. Interest rates are set by the Field Partner, and that interest is used to cover the Field Partner's operating costs. Kiva doesn't charge interest to its Field Partners and does not provide interest to lenders. Kiva also gives Field Partners the option to cover currency losses.

They promise not to have field partners that charge an absurdly high interest rate:

Our Field Partners are free to charge interest, but Kiva will not partner with an organization that charges exorbitant interest rates. We also require Field Partners to fully disclose their interest rates.

I don't know what would constitute as an exorbitant interest rate in this case, but I'm going to assume they are keeping that promise as they also have open books by providing a list of all their partners with the interest rates charged.

If you click the various partners you will get to see statistics for how much has been invested through that partner, how good they are at collecting money and so on. Kiva also outlines exactly how high the interest rate is with the partner you are viewing, how it compares to other partners in the same country and how it compares to the average across all Kiva partners. Here's one example:

                      This field partner     Median for MFI         All
                                             Peers in Country         
Kiva Partners
Average Interest       12.50%                16.17%                37.03%
Rate and Fees
Borrowers Pay
(Portfolio Yield)

If anything (although I'm not exactly familiar with aid organizations or micro-finance) Kiva seem to be doing a really good job at being transparent by providing all of this information so readily accessible on their website. It is as far as I'm concerned the donors fault if they give money to an organization that uses it in ways they do not approve of, when the donor hasn't done at least basic research first.

Unless there's strong evidence to suggest Kiva is actively misleading people, and/or exploiting poor people for the purpose of economic gain, I don't see how they could be called a scam.

  • 4
    @Lagerbaer - The original posting is filled with misunderstandings and fallacies, but I didn't think it would be interesting to pick apart. However I feel like it's completely missing the point. The issue shouldn't be if Kiva (or anyone else) is making money, but rather how much of an impact the loans create in the lives of those that receive them. – Kit Sunde May 22 '11 at 16:38
  • 2
    That's why I asked here :) But one interesting point was made in the posting: The interest rates might seem high for "our" standards (20% +), but for developing countries this is not much, especially when taking their often high inflation into account, and the fact that the fixed costs for paperwork etc. are the same for small as for large loans, so if fixed costs are included in the interest rate, this can result in quite a high interest rate. Both these points seem plausible to me. – Lagerbaer May 22 '11 at 17:08
  • 3
    @dbkk - I wouldn't phrase it that way. What the question is basing the claim that Kiva is a scam on is that Kiva supposedly is making people think the people who take the loans pay no interest. I simply pointed out that it's not at all the case, it says very clearly on their page that the people who take the loans pay interest (but not to Kiva like originally claimed) and I also pointed out that Kivas seem to be very open about the practices. I don't see how it's fishy if all parties are aware that this is happening. – Kit Sunde May 22 '11 at 20:27
  • 5
    @Kit, I agree Kiva seems reasonably transparent. Many charities take more in operating costs and are far less transparent about it. Still, the practices of local intermediaries are questionable. First case I randomly clicked on had 20% interest on a $1500 loan -- looks like a handy profit (zero risk for the lender), far beyond admin costs. – dbkk May 22 '11 at 20:47
  • 5
    It's also worth remembering that the costs of administering small loans (relative to their size) are incredibly high. That's why banks don't do it. The interest could easily go entirely to paying those costs. – DJClayworth May 24 '11 at 14:42
9

Bait-and-switch is a common class of scam. Wikipedia's "Bait and switch" article mentions vaporous on-sale merchandise that is gone when a buyer arrives at a store full of marked up merchandise. While the behavior arising with Kiva is not identical, the allegations are similar in that an incautious donor can be lured into doing something other than his original intent.

If a donor to Kiva is baited into believing that they are donating money to fund interest-free loans to poor 3rd world entrepreneurs with active businesses, and instead they are switched into donating money to fund interest-free loans to 3rd world micro-bankers with lending businesses, then when the donor discovers this they may sense a bait and switch.

Whether it is reasonable for a donor to feel bait-and-switched when there is disclosure is either a subjective issue or a legal issue likely to vary in various jurisdictions, i.e. whether there is legally or ethically sufficient disclosure is not a hard fact independent of time or place and is not the kind of fact-based scientific or logical question best answered on Skeptics.

Looking at http://www.kiva.org front page, the full loan process is not completely disclosed on the front page but instead is simplified to a 4 step process involving a donor/lender and a borrower: "How it works - choose a borrower, make a loan, get repaid, repeat". The donor may believe they are donating money or a loan of money, to the borrower. This is in fact a sales pitch. If you read the details, the full details are disclosed. The disclosure attempts to retain the potential donor instead of pointing out the relative benefits of being the micro-banker (or "field partner") vs the micro-borrower in this system. In taking this approach the explanation becomes more like marketing material (attempting to persuade) than disclosure material (attempting to educate).

There are other person to person lending exchanges which do not have "field partnerships" with exchange participants but rather simply match borrowers and lenders without favoring one side of the market or the other. Furthermore, charitable loans are sometimes possible on these for-profit web-based loan exchanges. This can be determined by looking closely at the rules to determine if this is possible. Prosper, for instance, uses a matching algorithm that allows lenders to bid an interest rate for a particular loan, and sorts the interest rates from low to high to determine a match of multiple lenders to one loan while a clock ticks down to the final funding decision. A charitable lender, then, could decide to lend a borrower's entire loan amount at any rate below the matched rate and thereby determine the rate and funding of that loan.

  • The -1 is for The last paragraph. You give the impression that someone could use Prosper to make a microloan to someone with no bank account in a remote rural area of Africa (one of Kiva's markets) without using a field partner. This is not even a little bit true. Prosper does not facilitate microloans and Prosper does not serve people without internet connections or bank accounts. – philosodad Aug 6 '12 at 12:24
  • @philosodad Well, I'm sorry you misread it that way. If you are located in the United States you could certainly borrow small amounts of money on prosper. Needy people in the USA might have running water, sanitation, internet, and cable TV that remote areas of Africa lack, but they are needy nonetheless. – Paul Aug 7 '12 at 17:46
  • When you say "There are other person to person lending exchanges which do not have 'field partnerships'", you imply that these exchanges are somehow similar in the services that they offer, but simply lack the field partnership. When you use Prosper as an example, the implication is that Prosper provides a similar service to Kiva. But it does not: Prosper will not touch microloans (loans under $2000.00) and does not operate where Kiva does. Your last paragraph does not belong in an answer about Kiva. – philosodad Aug 8 '12 at 0:03
2

That is how microfinancing works. As long as the people understand the terms and conditions that they receive with the loan - there is no scam.

The nature of microcredit - small loans - is such that interest rates need to be high to return the cost of the loan.

There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.

The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can't be cut below certain minimums."

  • 4
    The "scam" is not in microfinancing itself, the scam is that users are tricked into believing that they donate to finance the loan to a borrower described on the site, while they are actually donating to the owners of the Field Partner. Most loans are actually approved before the loan is even put on Kiva, and users are asked to voluntarily transfer the risk to themselves. – MatsT Jul 6 '12 at 15:28
  • @MatsT exactly my point. By donating kiva you indeed are donating to a field partner who doesn't have charity mindset instead a commercial mindset. I realised it was a scam when the borrower wrote to me a thanking note 🤣 – nehemiah Jul 27 at 0:31

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