What is Kiva?

April 29, 2010 at 3:29 am 1 comment

This May I’ll be going to Azerbaijan for 3 months to serve as a Kiva fellow at Komak, an Azeri credit union. Kiva means “unity” or “agreement” in Swahili and is an online microfinance platform that connects lenders with borrowers in 52 countries throughout the world. Since its inception in 2005, Kiva’s members have loaned over 132 million dollars to over 337,000 entrepreneurs (visit Kiva’s fact page for more interesting statistics).

So what is microfinance?

Microfinance is the provision of financial services to low income clients who traditionally lack access to banking and credit services.

Since the costs of administering loans are similar regardless of loan amount, banks tend to prefer customers who borrow higher amounts. For example, a loan from 1 customer who borrows $100,000 from a bank is less expensive to process than 100 loans for $1000 each, even if the interest revenue is the same.

Further, banks are generally located in urban areas, whereas microfinance institutions (MFIs) try to make their services accessible to the rural population. Additionally, poor people may have few assets that can be secured by a bank as collateral, while an MFI may be willing to lend solely on the word of a neighbor or to a group of borrowers who vouch for each other.

Why is it important?

Theory and practice suggest that microfinance has the potential to help poor people out of poverty by providing them access to (repeat) loans with which they can start small businesses, buy inventory and prevent bankruptcy during times of difficulty.

What are the limitations of microfinance?

Microfinance best serves the poor or slightly poor, but not the very poor and most remote. One criticism is that loans are often dispersed to people with existing business rather those seeking to establish a new businesses. Another criticism is that microcredit may be used to supplement the family income rather than make business investments that can empower the family for the future.

What are the controversies within microfinance?

One of the lovely things about Kiva is that all loans that are donated through it are given to the MFI interest free! Nonetheless, all MFIs charge borrowers interest. (Sometimes the interest is quite high – As of March of 2010, the average interest rate and fees charged by MFIs working with Kiva was about 36%) Why do they charge interest? To cover operational costs! Despite these high interest rates, the return on assets (ROA) for Kiva’s Field Partners remains negative on average meaning they are not making profits. Another important fact to consider is that despite the high interest rates, the MFI is a better alternative than the (only) other option available: an informal moneylender whose interest rates are significantly higher than the MFIs.

So why not “protect” borrowers by imposing ceilings on how much interest rates an MFI can charge, you may ask. Researchers, defendants and critics of microfinance alike agree that interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. Unlike in America where intense competition within the financial sector ensures that most people have access to some financial services, access to financial services are scarce in developing countries. MFIs provide an important & much needed service.

So why are interest rates so high?

Well there are staff salaries, transportation costs for reaching borrowers in rural areas, costs of information technology systems like computer and internet for uploading borrower profiles. Also since the loans are so incredibly small, charging higher interest rates is the only way to cover the expenses incurred in administering the loan (i.e. its way easier & less costly to make a loan of $10,000 than to make 100 loans of $100).

Furthermore: Borrowers in developing economies are usually in extremely high growth opportunity environments. Once they have financing to make capital investments (buy machinery, get the bike, buy in bulk from a wholesaler), their returns can be a multiple of the original loan (200-300%)!

* About 80% of loans posted to Kiva are pre-dispersed which means that by lending to this borrower you 1. assume his/her/their credit risk and 2. you allow the MFI that pre-dispursed this loan to fund yet another borrower who’s profile will appear on Kiva in the future.


Entry filed under: travel. Tags: , .

Kiva: Motivation statement Visiting my homeland and arriving in Baku

1 Comment Add your own

  • 1. Bob Harris  |  May 18, 2010 at 3:47 pm

    Hi Lena!

    My name’s Bob Harris, and I’m a writer doing a book about microfinance for Bloomsbury. You can look into my background pretty easily via my website and Google.

    I’ve plowed my whole book advance and more into microloans via Kiva, Babyloan, Rang De, etc., and now I’m traveling a lot to see the places that money goes. (My Kiva page is http://www.kiva.org/lender/bobharris — I’ve just passed 1500 loans, so you can see I’m pretty serious.)

    I might be in Baku for a few days in late June. If you’re interested and think it’s possible, I’d love to meet you for coffee for an hour and hear your experiences in the field.

    I’ll keep my visit brief and entirely at your convenience. I don’t want to take a minute away from the reason you’re there. Just eager to learn.

    If that sounds cool, say hey. We can chat via skype first if you like, or whatever works for you.




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