About a year ago, I was first introduced to the idea of microfinance through the website Kiva.org. I was fascinated by the idea and inspired by the organization. In fact, last year instead of purchasing Christmas presents for my family members, I donated $100 to the Kiva website and my family and I chose entrepreneurs from the website to invest in.
The idea of directly investing in an entrepreneur’s personal development from halfway across the world was something really exciting. As my parents themselves are entrepreneurs, they liked the idea that they were not “donating” money, but rather “investing” in fellow entrepreneurs. It is not a donation, it is a loan; this is not only important for us, but is also important for the borrowers. They are improving their own economic situation.
As Jessica Jackley, co-founder of Kiva, explains in her TED Talk, when she went to Kenya, Uganda, Tanzania:
I never once was asked for a donation, which had kind of been my mode, right. There’s poverty, you give money to help — no one asked me for a donation. In fact, no one wanted me to feel bad for them at all. If anything, they just wanted to be able to do more of what they were doing already and to build on their own capabilities. Because the best way for people to change their lives is for them to have control and to do that in a way that they believe is best for them.
The idea of being able to allow people to improve their own lives, in their own manner, was what really attracted my family and I to microfinance.
My family and I lent $50 to two borrowers in Kiva last Christmas.
The first loan went to a woman named Agnes, a single mother of three children from Kenya. She owns a small wine and spirits business and a small clothing business. She had asked for a loan of KES 70,000 loan, or $800, in order to purchase more inventory and grow her business. She belongs to a microfinance institution (MFI) called Yehu Microfinance Trust that works with Kiva. 31 lenders from the US, Canada, Europe, and Australia helped fund her loan. As of this month, Agnes has paid back 90% of her loan – with all payments made on-time.
The second person was a man named Faxruz from Azerbaijan. He is an internally displaced person from the city of Fuzuli and is currently living in the town of Alixanli. Faxruz raises sheep and had asked for a loan of 2,000 AZN, or $2,550, to buy more sheep and grow his business. His loan was funded by 83 lenders from North America, Europe, and Australia. Since his loan was for a larger quantity, his payment plan is a lot longer. As of this month, he has repaid 50% of his loan – with all payments made on-time.
With the money that has been repaid, my family has selected two additional women to reinvest the money repaid. We gave two new loans of $25 to each borrower. We plan to keep lending the initial $100 invested to new entrepreneurs every time our repayments total $25 – the minimum amount allowed to loan to an individual. It feels great to know that we have been able to directly help 4 families work to improve their own futures.
My mother has become especially passionate about choosing the new borrowers; she loves participating in the experience. People from all over the world have become very involved in their Kiva experiences. They share their excitement via social networks like Facebook and Twitter, feeling fulfilled in their ability to help others. According to their last statistics update, Kiva alone has lent a total of $376,456,100, from 847,759 lenders to 916,381 borrowers in 499,110 loans. The average number of loans made per Kiva Lender is 9 loans. Microfinance websites like Kiva have become a great platform to link people with a surplus of capital with those who would like to gain additional capital.
After beginning my master here at EOI, I have become increasingly critical regarding the systems in place to help eradicate poverty and promote economic growth. It has lead me to take a closer look at organizations, like Kiva, and try to understand their true impact in terms of poverty reduction and sustainable development.
According to Give Well, an independent, non-profit charity evaluator, Kiva’s microfinance model may not truly be as beneficial for the borrowers as described on their website.
As explained in my last post, microfinance organizations tend to offer extremely high rates of interest. Kiva supports local MFIs in the countries where the borrowers live; they do not directly disburse the loans to the borrower. For my family’s first two loans, through the local MFIs Agnes is paying an interest rate of 37.39% and Faxruz is paying 37.86% (according to the interest rates listed on the Kiva website, for each loan). Although the lenders on Kiva’s website are not charging interest to the borrowers, the MFIs are still charging extremely high interest rates. This method has been ridiculed by some critics and accountability websites.
Additionally, the concept of social performance for MFIs and recently become scrutinized. It has been argued that MFIs working with organizations like Kiva are pressured to keep their repayment rates high. Kiva, for example, boasts a 99% repayment rate on their website. In some cases, MFIs have pressured, and even threatened, borrowers when they are unable to pay on time. For some MFIs, the rate of return borrowers – those who come back for a second or third loan – is low, indicating that microcredit may not be truly successful in helping these entrepreneurs better their living situations.
There have also been arguments regarding problems of over indebtedness in some regions due to microcredit. Given that these communities are much more vulnerable to shocks in the economy or in their personal lives, many people may become unable to pay back these loans.
These arguments are difficult to answer. According to Give Well, many microfinance organizations do not perform adequate research to assess the true rate of poverty reduction, and improvement in quality of life, because of their programs.
So, is microfinance really helping alleviate poverty?
Should private donors, like my family, donate to websites like Kiva, Zidisha, and Global Giving?
Are these institutions and organizations truly improving the lives of their borrowers?
The answer is still up for debate.
(and now, I personally am unsure…)