A blog in response to comments under “Bad Roads, Interest Rates, and MFI Sustainability”
Food for thought on Interest rates
- Have you ever seen a microfinance institution?
Working with Community Economic Ventures (CEVI) in the Philippines I have come across the most passionate, forward thinking bunch of individuals who really care about the community in which they operate. They are of similar mindset to the lenders, Kiva staff, and us fellows. They are a part of this because they really care. Of course, they have operational costs! They have staff. They need to distribute the money. The loans are small.
- Kiva loans make up a maximum of 1/3rd of their total operations (for the purposes of risk) – can you imagine the confusion of some loans being zero interest and some being 30%?
I don’t know about you but I’m pretty confused by the concept of a zero interest loan in general. The fact if the matter is if you borrow money you get charged interest and this is happening globally. It would not be fair to give Kiva borrowers 0% interest while others pay the full amount. And I think equality is a big part of what we are trying to do here.
- What is the interest rate on your home loan? Is it fair?
Perhaps not – but you have to pay it. So you pick the best rate on offer and you roll with it. YOU MAKE THE CHOICE that the capital gain will offset the interest. This is exactly what these entrepreneurs do. Don’t doubt their intelligence. Sure they might not always make the best decisions but neither does everyone in the developed world. That’s just life.
- Do they have better option for access to capital?
I think that in these situations it’s best to ask the borrower’s! Here is part of an interview with a CEVI client who directly talks about her loan with CEVI and ‘small interest’. She is slow to speak as she is translating into English so please bear with her. I promise you this video was shot before I was aware of the blog comments.
Food for thought on the need for Microfinance Institutions
- Can you imagine the logistics of getting the exact same $25 that you donate to Kiva into the hands of a lady who lives somewhere that is not accessible by road, only by foot?
If you are worried about microfinance reaching the poorest of the poor then you know that “exact”person to person money transfer is impossible. I urge you to suck it up and realise that you are possibly contributing to that person’s next loan. Or read about Kiva’s new philosophy on lenders taking on loan risk in Claude’s Fellows Blog.
- How on earth could Kiva be expected to have enough local knowledge in the 52 countries around the world and the ability to disburse funds in numerous different languages when Kiva is a small operation with extremely dedicated individuals, on small pay and low operating costs themselves?
What Kiva manages to achieve, for the number of staff is amazing BUT Local knowledge is imperative – Kiva NEEDS the MFIs.
Please don’t let perceivably “high” interest rates and the presence of microfinance institutes deter you from lending on through Kiva! Be realistic and jump on the website now to get reloaning!
Living, Loving, Laughing 
Hi Anna! I came across your blog somewhere on the kiva website. I’m looking in to doing the fellows program myself sometime in the near future, so I’ll look forward to reading about your experiences!
Best of luck, take care -Ben M. (Alaska, USA)
Hey Ben,
Sorry about the delay in replying – I guess I got fairly caught up in the fellowship! You should definitely get involved in the Kiva cause. Volunteering with Kiva is a pretty unique opportunity. Be sure to get in touch if you have any questions okay!
Cheers,
Anna
Anna, you write:
* Kiva loans make up a maximum of 1/3rd of their total operations (for the purposes of risk) – can you imagine the confusion of some loans being zero interest and some being 30%?
I don’t know about you but I’m pretty confused by the concept of a zero interest loan in general. The fact if the matter is if you borrow money you get charged interest and this is happening globally. It would not be fair to give Kiva borrowers 0% interest while others pay the full amount. And I think equality is a big part of what we are trying to do here.
—
This is disingenuous and silly. You purport that a MFI that charges 30% interest, ostensibly to cover overhead and defaults, having an injection of interest-free Kiva capital that funds 30% of its loans, would be grossly unfair to loan the Kiva loans at 0% and the rest at 30%.
Maybe, maybe not. After all the loans are not the same; Kiva loans are specifically underwritten by INDIVIDUALS who receive no interest and bear ALL risk of loss for the MFI.
In any event, this is a false dichotomy. If the MFI was charging 30% to bear the risk of loss, then if Kiva funds 1/3 of its loans AND underwrites all risk of default, if the MFI charges a uniform interest rate, it should be closer to 20%, not 30%.
Hi Unconvinced,
You’re obviously a lot more of a financial guru than I – having come from a civil engineering background I won’t profess to be an expert. I was probably oversimplifying the figures as this is a general blog and was not specific to any one MFI. Part of Kiva’s policy is that a MFI cannot have more than one third of it’s funds coming in from Kiva so if the funds dry up from Kiva long term they will not be affected too badly. In the case of the MFI that I worked with the percentage of money coming from Kiva was significantly smaller than a third. On the ground I think 0% interest for some clients is impractical – although I know that some organisations have a reduced interest rate package for Kiva loans. The reason for me thinking that it is impractical is because all of the clients at CEVI were part of cluster groups in which 1 or 2 people would be Kiva clients shown in the website, and the rest would be regular CEVI clients. At these meetings clients hand over their passbooks and make repayments and pay their interest. If a couple of the members of the group were allowed to pay significantly less than the others it starts creating inequalities and questions over CEVI’s services. The reason that I feel comfortable about interest rates being charged, and the MFI’s making money off Kiva loans is that in actual fact there are a lot of Kiva related overheads that these institutions face. First of all the loan officers have to go to the effort of taking pictures of each client, to take pictures they need cameras, to do this it adds time onto their day. They also need to ask the clients a series of questions which will be used to create a journal entry and profile for the Kiva website. Once they have this information they have to feed it back to head office to process the loan. After going through all of these processes the MFIs really aren’t making much off the loan.
The reason I like Kiva is that it is spreading the word about microfinance, and it is building connections between developed and developing. You make the comment that these individuals receive no interest and bear all the risk of loss for the MFI, however I think in most cases they are only too happy to do so. I have been both a lender and a Kiva fellow and still don’t expect interest. Transparency is a big part of Kiva and while people will always seek to find criticism and flaws in every concept there is on this planet I will keep believing in Kiva and what it stands for. I say this after having spent 3 months, on the ground, seeing the inner workings of a microfinance institute in the Philippines.
I hope this clears a few things up for you? Excuse my lack of financial knowledge however I do think seeing things working on the ground helps you gain an appreciation for the processes these MFIs go through. Please let me know if you have any more comments, or questions. Cheers