Archive for the ‘Microfinance’ Category

Kiva, Transparency and P2P Microlending

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Posted 10 Nov 2009 — by admin
Category Microfinance

There’s been a bit of an ongoing debate about whether or not Kiva is what it seems. *cue ominous music* First, a post by David Roodman, followed by a response from Kiva co-founder Matt Flannery. More recently, Stephanie Strom wrote an article in the New York Times, to which Matt Flannery has also penned a response.

All my friends have been asking me what I think about this. My inbox is bursting with emails, my Twitter feed is … well, atwitter. Meanwhile, I never knew when I signed up to represent Kiva for 10 weeks in Indonesia that I was also signing myself up for a much longer-term commitment as a Kiva Ambassador. But all jesting aside, as someone who has gone behind the curtain and seen the inner workings of Kiva and one of their MFI field partners, here’s my own personal opinion (not endorsed in any way by Kiva) on whether or not Kiva is actually peer-to-peer microlending.

A Kiva lender and borrower are connected because:
- The lender ties the fate of hir money to the borrower’s ability to repay. In other words, if Wayan Puspa in Bali gets a bad harvest, Bob Smith in Idaho won’t get his $25 back. This is why Bob gets updates on Wayan’s business — because Bob has effectively invested his money in Wayan’s business.

A Kiva lender and borrower may be connected as follows:
- Wayan Puspa may not know about Bob Smith or Kiva being the source of her funds. This largely depends on the MFI Field Partner that’s handling the loan on the ground. I know Kiva Fellows who have gone out into the field with printouts of Wayan’s borrower profile and have shown Wayan the names and faces of all the people who have contributed to her loan, to everybody’s delight. I know that clients have made videos to thank their lenders personally. But there’s no guarantee that this will be the case.

[On a personal note, I wanted very much to do this but I couldn't, because (1) Many Kiva lenders put pictures of their pets on their profiles, and my clients would have been offended by the idea of borrowing money from a dog, and (2) In the religious environment in which I was operating, I did not trust myself to be able to respectfully and sensitively explain to borrowers and MFI staff members that their funds were coming from atheists and LGBT people -- I struggled a lot with this. Despite this, all clients still sign a waiver saying at minimum that they understood that their personal information and images were going to be made public for fundraising purposes, and that they are okay with that.]

A Kiva lender and borrower are not connected in the following way:
- Wayan Puspa usually has already received the loan by the time the fundraising on Kiva happens. Kiva funds will reimburse/guarantee the money that the MFI fronted for Wayan Puspa. If many loans posted on Kiva end up not getting funded, the MFI might not be able to make loans to future clients, but it won’t be able to withdraw a loan that’s already been made.

Overhead You don’t donate through Kiva — you loan. Your entire $25 (or whatever amount) goes to the MFI Field Partner and is earmarked for the borrower. None of this money goes towards operational costs, not for Kiva nor for the MFI Field Partner. Kiva does ask for an optional donation to cover their administrative costs, but this is by no means mandatory. Currently, the suggested donation is 15% of your loan amount, or $3.75 for the usual $25 loan, which most lenders are happy to give.

Transparency The date in which every loan is disbursed is listed on the borrower profile, and you can see that in most cases, the disbursement predates the fundraising on Kiva. Check out this example, in which a profile was posted on Kiva 5 days after the loan was disbursed. The How Kiva Works page has more details.

My take At the end of the day, you’re still investing your money in someone else’s livelihood. I think of it like swiping my credit card to pay for something. I’m still liable to pay for it, even though the details are complex and no money will leave my account for another 30 days. Kiva has channeled $100m in funds to microentrepreneurs in only 4 years. There’s no way that would be possible without working with their MFI field partners, and without operational abstractions that strike a difficult balance between creating a personalized user experience and maximizing efficiency.

Popularity: 89% [?]

Why Kiva is about more than just microfinance

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Posted 17 Aug 2009 — by admin
Category Microfinance, Travel

Kiva is a website where anyone with access to Paypal can make a loan of US$25 or more, specifically to a microentrepreneur, located in any of an ever-growing number of countries. You can browse profiles of these people, learn about their businesses, find out how much they want to borrow, and then contribute towards their loan.

When they repay the loan, your money is returned to you, interest-free. In the unlikely event that they cannot make their repayments, you could lose your money. But default rates for each of their partners on the ground are listed clearly on the website, and they are usually very low. The Kiva partner that I was working with over the last few months experienced problems with fewer than 1% of its borrowers.

But Kiva is about more than just microfinance. In fact, Kiva’s motto is “Connecting people, through lending, for the sake of alleviating poverty.”

How does that work? Well, the profiles of borrowers on the Kiva website contain a story about them, little details that help you decide who you want to lend to based on some kind of connection. I spoke to a woman who wanted a microloan so she could buy and sell recyclables from her house, instead of going out to scavenge through dumpsters. This would allow her to spend more time with her 2 young children. Her loan was funded quickly, and I’d imagine some lenders were probably motivated by her desire to be more present in her children’s lives.

More than that, Kiva sends a cadre of Fellows all over the world to manage their relationships with the partner microfinance organizations that actually make the loans on the ground. These Fellows (myself included, because that’s what I’ve been doing these past few months) interview borrowers and tell their stories. Often, the impact of a loan ties into other parts of their lives.

Most recently, I saw a video about a Kiva borrower called Nermina. A war widow in Bosnia, she used her loan – funded $25 at a time by people like you and me, through Kiva – to buy a greenhouse, so she can support her kids financially. Told through the eyes of Kiva Fellow, Milena Arciszewski, Sloane Berrent calls this a “compelling, tragic and unforgettable story.”

Watching Nermina speak was like a punch in the gut. 200,000 people murdered, mostly Bosnian Muslims. The worst genocide in Europe since World War 2. I haven’t been to a museum or a memorial or any other place in which these atrocities have been documented. But I got to hear it directly from Nermina, because of her Kiva loan and my interest in microfinance.

Part of responding to any tragedy – war or poverty – is documenting stories from survivors. Providing them with capital through microfinance also helps, but I’m glad that Kiva is going above and beyond, doing its part to listen to and record the stories of people who are surviving poverty every day, and making them available to the world so we can all learn and remember. Here is the video of Nermina.

Popularity: 50% [?]

On mobile phones, bargaining and economics on the streets of Bali

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Posted 13 Jul 2009 — by admin
Category Microfinance

My very first day in town, I tried to buy a prepaid SIM card for my mobile phone. I was staying at a hotel temporarily, and they had a few cards for sale at the reception. I was a little confused by the wide range of SIM cards they offered, all from different mobile phone providers, but I’d done some research online and I knew the most popular options were SIMpati Pe De (pronounced “per day”), XL and Flexi.

I asked the receptionist which of the carriers was the best, and he said Flexi. I thanked him and decided I’d take a little walk around the area before committing. Unsurprisingly, each SIM card vendor that I spoke to recommended a different provider, and here’s why: Tariffs are cheap within each network, so if you have a Flexi SIM, you’re better off talking to others who also have numbers from Flexi. But calling from Flexi to XL would cost you a bomb.

Later, I’d discover that many people carry around multiple SIM cards, if not multiple phones, so that they can take advantage of this pricing system.

I decided that I’d go with SIMpati for my mobile phone service. Word had it they had the best coverage within Bali, and their SIM cards seemed to be in high demand. So much so that when I asked a guy at one kiosk how much a starter pack would cost (SIM plus some credit), he quoted me a price of 50,000 Rupiah.

“But the price written on the package is only 10,000 Rupiah,” I said.

“Well, if you want an XL card I can sell it to you for even less than face value,” he said. “But for SIMpati, sorry, many people want them.”

I marched off, muttering underneath my breath about how this was highway robbery, and was he playing me for a fool. Right then, the street lost power, and I walked another 40 minutes in the dark before I found a mobile phone kiosk willing to sell me a SIMpati starter pack for a modest 50% markup off the face value, or 15,000 Rupiah.

Later, my roommate pointed out to me that I’d gone through a lot of trouble to save roughly USD 3.50. “But it was a moral victory!” I protested.

Moral victories don’t count for much here. From a western mindset, it’s very easy to think of bargaining for everything as somehow being primitive or inefficient. But it really is a free market on the streets of Bali, at least where pricing is concerned. Regardless of whether or not you get ripped off by objective measures, you have a choice, and eventually you end up paying what the item is worth to you.

Back to mobile phones, eventually my starter credit ran out and I had to buy a top-up. Refills also went for market rates: Typically, if you wanted a top up worth 10,000 Rupiah (USD 1), you’d pay 12,000 Rupiah, or a 20% mark up. A 50,000 Rupiah top up would cost 52,000 Rupiah, at a 4% mark up. And finally, if you are feeling flush, a 100,000 Rupiah top up would sell at a discount, so you’d only pay 96,000 Rupiah.

In an environment where haggling is common and purchasing power can bring prices down greatly, I am not surprised to see microfinance thriving. Assuming I go through 100,000 Rupiah of phone credit every 4 months, I would do well to take out a loan for 96,000 Rupiah at 18% APR, pay back a total of 104,000 Rupiah over time, and still end up 16,000 Rupiah ahead than if I’d bought the phone credit in 10,000 Rupiah increments.

I am fortunate enough to have scale on my side. Paying 96,000 Rupiah (about USD 9.60) at a time for a mobile phone top up is not a hardship for me. As a foreigner, I’m still trying to get the hang of variable pricing, but when the poor are punished so harshly for their lack of access to capital, perhaps my roommate is right, and I need to spend more time helping them and less time haggling over three dollars and fifty cents.

Popularity: 63% [?]

The economic crisis, sustainability and microfinance

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Posted 30 Jun 2009 — by admin
Category Microfinance

Before I came out here, I was wondering how microfinance would be impacted by the economic crisis. How coupled to the global economy is the fate of a rural pig farmer? Not very, I thought. People have got to eat. As it turns out, the microfinance institution (MFI) where I’m working hasn’t seen a marked increase in borrower defaults and delinquencies as a result of the crisis. But they’re feeling the impact of the credit crunch in a different way — their funding is drying up.

Simply put, MFIs receive grants to allow them to lend money to borrowers. Now there are just fewer grants out there, which means they can’t offer their services to as many clients as they’d like. Thankfully, they are still stable enough to serve their existing clients.

While I work on cash flow management and foreign exchange hedging, 2 other volunteers are hard at work on a sustainability calculation. In other words, how much would the MFI have to charge as interest in order to cover all its (already low) costs without receiving any outside grants?

Microloans already have high interest rates (20-30% a year isn’t uncommon), due to 3 reasons: lack of scale – the administrative costs of a $100 loan are proportionally much higher than the cost of administering a $10,000 loan, client visits – loan officers head out on motorcycles, spending hours to visit borrowers, often collecting money weekly instead of monthly, and additional services – MFIs often offer training courses to their clients, and give them access to health resources whether for themselves or their livestock. For example, my MFI has a vet on call, who regularly inspects the enclosures used by all our clients who raise animals for sale.

I suspect that sustainability is within reach for my MFI. If it decides to go in that direction, the result may not be pretty — as interest rates rise, I’m sure borrowing criteria will become more stringent, leaving many clients behind. Perhaps only larger microloans would continue to be funded. I could easily see how efficiency exercises could result in a lack of personal connection between loan officers and clients.

Embankification is rife within the microfinance industry these days. MFIs are turning into small-scale banks all over the place. As small-scale banks, MFIs can access capital at market rates. Their executive directors (CEOs?) can for the introduction of more profitable loan products instead of writing grant applications. Perhaps MFI staff members would be paid more, about which I wouldn’t shed a tear.

As for the MFI I’m working with, I think they will continue to be partially self-sustaining, with the remainder coming from grants and interest-free loans. Their mission is to serve their clients first, and to earn money second. Is that irresponsible? I honestly don’t know. They’ve been doing this for 17 years, weathering more than one economic crisis, so it seems unlikely that they’d just go belly-up.

And if it were to come to that, what if they’d rather go out of business than charge their clients significantly more interest? For most of their clients, a big hike in interest rates might be functionally equivalent to them no longer offering loans at all. If their mission is truly to lend money at low interest rates (and not, say, the lowest they can offer while covering their costs), then if there comes a time when they are no longer able to fulfill that mission, would they be happier disbanding and doing something else? I don’t pretend to know the answer to that question, but isn’t it worth asking?

Financial sustainability is the holy grail of non-profits right now. But if people don’t live forever, than should organizations? I don’t pretend to know the answer to that question, but I have a fair bit of respect to the old-school attitude of the MFI I’m working with. I hope that if I ever start my own organization, I’ll be really clear about what I want it to stand for, and the day that’s no longer feasible, I’ll hang my hat and go home a satisfied man. Meanwhile, for this MFI, I hope that day won’t come anytime soon, and that soon these years will represent just another storm weathered in service of their clients.

Popularity: 34% [?]

On microcredit, power, influence and cultural relativity

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Posted 24 Jun 2009 — by admin
Category Featured, Microfinance

Today, I visited a man who collects and buys recyclables, then sells them to a “boss,” who runs a similar business but on a larger scale. The only thing separating someone who picks through trash and a collector and buyer is capital, which a microfinance institution (MFI) can provide. During the interview, he admitted that despite their poverty, and despite not having children, his wife doesn’t work.

“Where I come from, women don’t work,” he said. “Well, I suppose it’s fine if a woman works, but then you wouldn’t marry her.”

The MFI staff member who was speaking with him was a woman. She hid a grin and glanced over in my direction, possibly because she knew something of my politics.

“Is that so,” she said, and we continued the conversation without missing a beat.

I felt conflicted about her impartial response. If she were working for a bank, then his attitude would be none of her business. But MFIs like the one I’m working with are not banks — they also have a social mission to help those in poverty. That means that an agreement between an MFI and a borrower covers more than just the money. In addition to whether the borrower will be able to pay back the loan successfully, this MFI also offers education and training sessions.

Groups that come together to raise livestock have to go through 4 mandatory training sessions before they can get their money. They devise their own membership rules for members, they are led through a solidarity chant (like a team huddle before a basketball game), they are given a speech by a veterinarian and the animal pen that they build is inspected for health and safety. Every group meeting starts with a prayer, led by the group leader. With both individual and group borrowers, loan officers take an interest in their businesses throughout the duration of the loan. They may drop by, unannounced, just to check up on things. With all this oversight, the line between what is and isn’t an MFI’s business is blurry.

The loan application process is thorough requires detailed information about their living conditions to ascertain their level of poverty – what kind of roof their house has, what level of education their kids have, what kind of food they’re able to put on the table. Many requirements are culturally specific — for example, 16 year olds can join in a group loan if they are already married, because marriage decreases the risk that they will run off to another village before the loan is paid back. To me, many of these lines of questioning are intrusive, but the borrowers I’ve spoken to don’t seem to take offense. I wonder if it is because they are more open about their lives, or because they don’t have a choice, since the MFI has all the power in these situations. After all, the MFI provides capital to an entrepreneur, without which his or her business might not exist.

From what I’ve seen, for the most part, MFIs try to wield this power judiciously, walking the fine line between providing education and training, and trying to convert others to their way of thinking. I’m working with a Christian MFI, but they fund people of all faiths. They make an effort to reach newcomers, originally from other parts of the country, whose values may differ from their own. They serve their Hindu neighbours who make and sell ornate crafts that are laid out as offerings every morning and evenings (to the chagrin of some Christian Kiva lenders in the United States, who have decried this as funding satan worship!).

It’s a difficult balance to strike, and sometimes despite the best of intentions, we don’t get it right. Yesterday, two loan officers met up with the leader of a group of women pig farmers on their way to the group meeting. She was riding a small motorcycle (about 115cc) that was styled like a “crotch rocket”, with plastic fairings and a forward leaning seat position. The loan officers, both men, were horrified.

“Why don’t you change your bike!” exclaimed one of them. “Get one that’s more suitable for a woman.”

The group leader shrugged and didn’t say anything. After the meeting had concluded, and she zoomed off on her bike, one loan officer turned to me and tsked, shaking his head and saying, “Like a man,” with a disgusted tone of voice. The woman, for the record, was unmistakably female, with waist-length hair, and a mother of several children.

Astounded by how little it took to transgress gender expectations, I told him that a motorcycle was a motorcycle and I didn’t see why a woman couldn’t ride any motorcycle that a man could. But I wasn’t changing his mind any more than the female loan officer had changed the mind of the recyclables collector who had his wife stay home despite struggling on just one income.

Most microloans worldwide are made to women, and microfinance has gained a good reputation for furthering women’s rights — generally, as their economic power improves, so does their social influence. But it is important to remember that microfinance is just a tool. It can be indifferent to gender equality, in the case of the collector of recyclables, who would have been given a loan regardless of his opinions on women in the workplace, and it can also perpetuate strict gender roles, to the point where a woman can be made to feel bad because her motorcycle is too “masculine” for her.

How much influence would you like to have over the people you lend money to? If it is appropriate to use education as a tool to change a borrower’s opinions on business, then how about on women in business? What if a small business owner refuses to hire women? Religion in business? If an MFI can insist on a short prayer before every meeting of pig farmers (and many do), then would it be any more or less appropriate to insist on what type of prayer and to which deity? Or should the prayer itself be replaced by something more secular? Given that MFIs serve a client and his or her community with their own distinct culture, beliefs and traditions, how do we decide where to draw these boundaries in a way that will serve borrowers and lenders well?

Popularity: 40% [?]

What in the world is Zev up to?

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Posted 03 Jun 2009 — by admin
Category Microfinance

I’m in Bali working as a Kiva Fellow. It’s an unpaid gig but it’s definitely keeping me busy for the next 10 weeks.

Kiva is a website where you can make a $25 loan to an entrepreneur who needs a few hundred bucks to buy a cow, a pig, or food to sell at a local market. You can browse entrepreneur profiles and loan to those whose stories touch you, make you laugh, or appeal in some other way. There’s more than a 95% chance that your borrower will pay back their loan. If they don’t, you’ll find out what happened – was it a storm that killed the animals? a drought? a death in the family? an oversaturated market? – and you could stand to lose some or all of your money. The loan is approved and administered by a local partner institution, like Dinari Foundation Bali.

My work here falls into three categories — finance (forex hedging and cash flow management), development (conducting training sessions, working on IT and IS management) and storytelling (videos and blog entries, as well as borrower profiles and updates).

Working in the field is not without its challenges. It took me 30 minutes to post my last blog entry, and that was after the video had already been uploaded. Also, my daily commute is somewhat hair raising. But that aside, I’m in good health and definitely staying well fed.

Popularity: 20% [?]