Many people emailed me regarding the New York Times article titled Confusion on Where Money Lent to Kiva Goes. Essentially it lends weight to a month long controversy in the blogosphere started by David Roodman’s ‘revelation’ that Kiva does not directly disburse loans to lenders, but rather through intermediary Microfinance Institutions. But this was not a revelation, merely a realization that Kiva’s logistical nuts and bolts evaporate the magic image of direct-payment poverty eradication.
The New York Times article runs with Roodman’s valid concerns but makes inane criticisms. Specifically I want to comment on the following: money lent through Kiva may not support the selected borrower, the viability of Kiva’s model, the money lent finances broader institutional programs and Kiva’s reliance on volunteer auditors.
Financial institutions of any kind function on the fundamental premise that money is fungible. In other words, when you lend through Kiva it is like pouring a cup of water into a river that has tributaries spreading across the world. Your specific loan becomes indistinguishable from the flow of currency. So a microfinance institution posts two borrowers seeking loans of $100 to Kiva’s website and you decide to fund one in full. Your $100 becomes part of their overall pool of faceless capital from which all loans are disbursed.
What may seem dishonest is that Kiva’s model assumes that money is also fungible across time. Meaning, the MFI posts a $100 loan yesterday and you fund it today. The net effect is the same in that you have ownership of that loan. And for anyone who thoroughly reads a borrower profile this process is totally transparent (note the “About the Loan” section: “Date Listed” vs “Date Disbursed”).
Like I said, this removes some of the Kiva magic but serves a purpose. The reasoning behind the temporal fungibility directly implicates viability. Both Roodman and the NYT seem to perceive Kiva strictly as a tool for the lenders. In reality, it is much more a tool for the Mircofinance Institutions. They are the ones who find the borrowers, interview the borrowers, photograph the borrowers and upload the borrower profiles and journals. The most effective way to execute the loan transaction is via immediate disbursal to a worthy client and then have Kiva lenders reimburse the MFI.
And to be blunt, if it were done the other way around (where borrowers would only receive a loan if it were fully funded on Kiva) it would be appallingly offensive and degrading to people. And if that were the case, Kiva would become nothing more than a popularity contest of individuals begging and not applying for loans.
Notably, neither Roodman nor the NYT offer a different peer to peer lending model. I came up with two possible alternatives through a thought exercise. The first logical solution was Santa Claus. One volunteer with a form of green transport that can take him around the world in one night, disbursing loan increments to all the worthy borrowers. Perfectly effective, carbon neutral and no loss of the magical Kiva image.
The second alternative would be to change Kiva from a web platform that connects lenders with borrowers to an MFI. It would need hundreds of branches all over the world that were technologically equipped. It would need motorcycles at every branch (to reach the far off rural borrowers), credit officers and currency-filled vaults. It would employ armies of local accountants and lawyers to navigate the pitfalls of conducting business in foreign legal systems.
The further the thought experiment goes the more non-viable it becomes. Kiva would go from a lean operation that has 50 employees with hundreds of volunteers, which I believe is part of its appeal, to a global financial non-profit with billions in overhead csts. Where would that level of funding come from? How can one maintain transparency and accountability at that size? And how would good governance be enforced?
Moreover, why would Kiva try to replace an already existing infrastructure? What I just described is how Microfinance Institutions already work. They are doing the heavy lifting necessary to diminish poverty and democratize access to capital; but most of the MFIs that Kiva partners with are non-deposit taking institutions and need sources of capital to continue their work. Unlike what the NYT asserts, Kiva loans do not fund broader institutional programs. Although money is fungible, accounting rules still apply and capital for loans must be used to make loans. If Kiva capital were being used for any other reason by an MFI, we would terminate the partnership.
I would have agreed if either Roodman or the NYT were making the valid criticism that the interest charged by MFIs on Kiva-funded loans, a detail that Kiva does not clearly state, is used to fund their programs. But the programming is pivotal to poverty reduction when it comes in the form of agricultural workshops, financial skills workshops, computer training workshops, etc.
Finally, as one of the ‘volunteer auditors’ I want to make clear that the NYT did not research its piece properly. Ernst and Young audits our largest partners for us without charge. Kiva has an in-house team that evaluates the quarterly financial statements of every partner MFI. As Fellows some of our responsibilities are to audit the borrowers and confirm that the MFIs are keeping accurate records and uploading accurate information to the website. We also assemble reports to send back to Kiva’s risk team.
I am tremendously disappointed at the NYT’s attempt to nail Kiva to a cross of inaccuracies using shoddy journalism and misinformation. Development and poverty relief are complex problems. Kiva attempts to support the necessarily complex solutions, while at the same time providing a sleek interface that allows anyone to participate. I think the real revelation that Roodman and the New York Times touch on but do not acknowledge is that the lenders, though generous, are not the true heroes of the Kiva model – that distinction goes to the Microfinance Institutions.
For a fantastic response to Roodman’s original post please read this article: Breaking Our Dependence on the Donor Illusion