Uncovering Kiva- just another NGO

Over the last few days I have been following the twitter chatter and blog posts on the debate surrounding Kiva’s actual microfinance operations vs what is actually portrayed in their website.
Explained in David Roodman microfinance open book blog in lots of details explained here, but basically the peer to peer lending that users of the site see is not what actually happens behind the scenes. Less than 5% of kiva loans are disbursed after being posted and funded on the site. The operation is closer to when an organization says “sponsor a child for 1 month of food”, but actually what happens is the money is pooled and efficiently allocated by the organization for the best purpose- the headline becomes purely a slogan for marketing purposes to better emotionally connect and get donors to part with funds. This behaviour led to an explosion of child sponsorship programs in the 1990s and Tim Ogden explains it well here.

I want to dive into Kiva here because many believe that microfinance to be the silver bullet in development. I have always been skeptical of solutions or policies that have worked in one contest being used in another totally different one- in this case microfinance is proven in south asia due to the high population densities and hence low cost to serve clients and this has not seen as dramatic an impact in africa due to low population densities in rural areas. In the end- africa needs many things, and microfinance cannot construct ports, roads and create enterprises that create 1000s of jobs and lead to long lasting sustainable financial security for africans- it is merely a stepping stone.


The notion that NGOs sometimes play service to their donors more than the people they are meant to help is an age long issue with the aid industry and it can lead to a focus on fundraising to survive rather than serving clients- Sasha's from Acumen fund explains this in context to Kiva here. The business world solves this with the profit motive and a focus on shareholders which brings sustainability- in this model- serving the shareholders and clients most often brings mutual happiness- and the bigger the organizations grow, the happier both sides tend to be- at least, i.e. the model “scales well.

I have had the pleasure of seeing Kiva grow from a 3 person operation ran by the now CEO Matt Flannery and co-founder Jessica Jackley- Jessica was in fact my classmate in Stanford Business School between 2005-2007. What I can tell you then about how Kiva ran as a small startup non profit, and its goals at the time, were to do exactly what the website says now- peer to peer micro lending with a high emotional touch through its website. Money was wired to a Pastor in Uganda after details were posted on the site and the Pastor acted as the loan officer to disburse loans, collect repayments and do any due diligence and effectiveness reporting. There were some challenges related to fraud and Kiva team had to fly down to clean up , but essentially it was simple and naïve to the wider complex microfinance industry.
Kiva reacting fast by posting there actual process- something I think they should have done themselves without being prompted by the blogosphere- in any case, they reacted correctly as I believe waiting for this to hit the mainstream media would have been disastrous for them.

In the consumers need to understand the Kiva, rather than rely on a simplistic model they grew away from no matter how well it helps attract donos- Understanding Kiva means understanding the Microfinance industry (Matt, in response to David Roodman's, post admits that the site oversimplifies the process to consumer ). It is more complex than most users of Kiva realize. Regardless of what people think of Kiva now given this new information about their operation- one thing that in undeniable is the effect Kiva has had in bringing awareness of the microfinance industry to the masses and hence rally the masses to participate resulting in additional capital – this is a net good thing.
There is good info here about how the Microfinance industry works- but essentially you need to understand that around the world- most microfinance services are delivered by microfinance Institutions. These institutions offer microfinance products including loans, savings and insurance- they are in like traditional financial institutions serving clients with much smaller capital needs.
Mohammed Unus won the noble prize for his work here and growing Grameen bank into a powerful force. Some of these organizations are non-profits, some are for profit and some are hybrid. The hybrid scenario is one of the key issues here since they can often have conflicting requirements to serve shareholders for profit vs serving their mission, helping the poor- Kiva has the new process of working with them and in the diagram Kiva posted, it refers to them as field partners- probably to reflect the difference in these MFIs.

As Kiva has mentioned, in the early days, the Pastor in Uganda, acted as Kiva’s first partner and effectively a “one man MFI” and for most purposes was a volunteer/employee of Kiva who had a genuine interest in serving the community by providing loans- he also understood he had to wait for funds to come from the USA from the donors before he could make loans as well as he had a duty to send money bank on repayments. This worked well and is pretty challenging given Africa infrastructure, but the kiva peer to peer process was born and it was what made the service appealing and hence led to growth. Now scaling this up 4 years later- Kiva is a global organization serving potentially millions of clients and possibly 100s of MFIs which are themselves big organizations- the chain they deal in more complex and their new updated process reflects this. As with any organization, going from being a startup to growing up into a big player participating in many channels means you cannot operate in the same manner- the peer to peer model that was born could not scale. The Pastor is replaced by MFIs, many with different operating models (for profit, NGO or a hybrid) and hence different objectives. A key metric that pertains to Kiva is the cost of collecting and posting the loan transactions onto kiva’s site- this becomes more challenging as you scale and deal with different MFIs It gets tougher to account for microloans-so taking a “net balance” approach is efficient. Kiva essentially lets MFIs disbuse loans in expectation of the information being posted and actually funded on the site hook up into Kiva’s system- all the action happens before a donor funds an entrepreneur- and the accounting is taken care afterwards, funds may end up with someone else. This helps the MFIs be more responsive and client driven and hence they can co-exist with Kiva as a mobilizer of capital and bringing an emotional (albeit mostly false) face to the microfinance process. This is how Kiva best figured out that it can best slot into the huge complex microfinance industry and best provide additional value and help address some key challenges. Kiva lets the existing players do this well and supports them with capital and tries to make them more transparent and provide a face to donors. Matt Flannery put it best that they aim to be bring transparency and accountability in the microfinance and aid industry- that is a worthy goal to pursue and I feel is the right thing for Kiva given the structure of the microfinance industry and the problems that need to be solved.

So now, what exactly is Kiva? Kiva started of initially of more like an “ebay”- with the peer to peer microlending – now they are connecting these consumer donors to a complex chain of MFIs who provide loans as an additional source of capital, with many depending on them for a reliable source of interest free capital. Kiva is not an “Amazon” which controls a big part of the chain and hence be able to perpetuate the peer to peer microlending model on its site, and I think it’s what consumers were lead to believe. Maybe one day Kiva will be large enough to exert influence to have it’s own microfinance on the ground agents and operate more like an Amazon disrupting MFIs and showing them a better more transparent way to operate- organizations adapt and change so you never know, but consumer donors should.

Looking very candidly on what Kiva does and what has led to their sustainable success and existence I can gleam that their core competence is:
• Connecting ordinary consumers to be able to participate in microfinance through donations and build an emotional connection between donors and loan recipients.
• Provide transparency, accountability and capital support to the microfinance and aid industry by democratizing through the web.

Kiva is not in the business of making loans- they are actually in the charity business- just like any other NGO- the MFIs do the real work- Kiva supports them with source of cheap capital and gives donors an emotional connection with loan recipients.
What off the future of Kiva? I speculate that two things can happen in this part of Microfinance (the consumer donor to MFI fundraising):
- MFIs create their own consumer facing “peer to peer” fundraising sites and hence cut out Kiva as a middle man
- MFIs don’t need additional capital from donors through Kiva due to their own operational and capital raising improvements. In short they become sustainable for profit entities.

Both won’t happen very soon given the structure and issues in the industry. But this end game is actually one of the key issues that perpetuates the aid industry- once the original mission is fully served, there should be no need for the NGO- success can lead to the demise of the raison d’être of an organization unless they move onto another related mission.

China... Has arrived.

I am sure this will be one of many posts.
Tanzania embraced socialism under founding president Nyerere begining the end of the 1960s- The communist powers of China and Russia went up against the west to exert influence over Tanzania. China contributed to aid development projects including Dar es Salaam's international airport- ultimately western powers won over and we know what happened- multilateral and bilateral aid organizations kicked in over the decades preaching deregulation, free markets and cut in government spending with a mixed success.
Meanwhile China grew to a major economic power it is today going head to head with western powers in the development game- I could go on about countless development projects that China has now undertaken in Africa in exhange for resources to meet China's growing demand- but I will touch on some to highlight new challenges and opportunities:

- Take a walk around the kariakoo neighborhood of Dar es Salaam and you will see many chinese residents living in apartments among the lower to middle class communities- in many cases, they are the only middle class in some areas. There seems to be no known estimates of how many Chinese residents there are in the city yet alone the country, but it is safe to assume it is on par or more than tradional westerners working at NGOs and multinational organizations. There are even quite a few tourists arriving recently.

- They are working at small businesses from car panel beating shops to flooding the market with cheap and often fake Chinese imports and even some higher value work such as contractors in construction and of course big factories too. You don't see any working at any NGOs or religious groups.

- Tanzanians remain welcoming yet growing cautious and suspicious, in some cases fearing them- as I noted they bring in cheap and often fake Chinese manufactured goods flooding the market. It is rumored that many of them are chinese political prisoners sent to Africa on projects. On a lighter note- thugs used to robbing white expats in broad day light have tried it o with the chinese and have been beaten- they now fear these "Kung-Fu" wielding people.

-Then there is the impact on wildlife- alarmingly elephant poaching is on the rise to meet a demand for ivory in china and other asian countries- reducing a 1/10th of populations. Recently seized ivory tusk DNA testing shows the majority originating from Selous Games Reserve in Southern Tanzania. It is thought these poachers are part of sophisticated Chinese and other Asian organized traffickers.

This illustrates that the Chinese are here and here to stay and well intergrated into the formal and informal parts of the economy, not in and normal ex-pat integration of NGO and multinationals we have seen over decades. It will be interesting to see how this affects the economies of African countries such as Tanzania- will we continue to deal with fake goods from mundane cheap electronics to life saving treatment drugs? Will the growing Chinese owned small businesses, provide greater employment opportunities for locals vs just the Chinese? How will Africa work with the Chinese for a sustainable partnership to protect resources, curb poaching and respect human rights?

-- Post From My iPhone

Running a franchise operation in africa

Franchise or retail/kiosk heavy operations are an obvious way to reach and deliver services to the masses. Cell phone top up vouchers are probably more widely available in parts of Africa than mosquito nets or a bottle of water. CFW shops are perhaps one of the most radical franchise/retail kiosk innovations I have come across- turning an inherently centralised service delivery method of hospitals, often crowded and inefficient, to a distributed lean operation empowering local entrepreneurs and distributing health services to rural areas.

These franchise approaches have the potential to innovate in everything from utilities, IT/telecomms and healthcare. Challenges are plenty though- start with the biggest- theft. Employees running any operation are likely to be tempted to steal given how much responsibility is put upon and especially if the turnover is high- take a popular bar with a large stock of drinks- it is inevitable that employees will sell drinks on the side or retain part of the sales for themselves- this extends even to other services, it is reported that vodacom in Tanzania lost millions of dollars through top of voucher theft until they finally made the distributors buy the full value of the vouchers for resell. Bottom line is it is hard to trust employees at such franchise or distributing operations without thought and some serious controls- some are obvious, but worth spelling out here:

- Make your operation process transparent and easy to account for service or inventory- don't assume employees will be fully trustful. This could be as crude as separating payment (with a manager you trust) from actual service or product delivery, new rank and file employees.
- reduce temptation by not having too much cash or inventory build up at each distributor or service location. Check and monitor operations regularly- show employees that you are detailed orientated to the very last penny.
- Hire the most trustworthy people and pay them enough to not be tempted to steal from you- provide enough incentives for them to stay around through bonuses and equity ownership. Too many businesses in Africa start without thinking about this- how will you grow and be successful if you don't give your employees a meaningful stake in the company and so are less tempted to steal but rather to work and improve sales.

- Finally, factor in up to 10-20% contingency for theft in business planning- established businesses have contingency for everything such a bad debts to potential lawsuits/legal fees. In an African retail or distributor operations- contigency for theft is just good business.

Global fund Mismanagement in Tanzania

Classic Development 1.0- There is no point in donors providing funds when a recipient country does not have the capacity to handle it. A recent report shows that over $800k of ARV drugs have been mismanaged, some of the reasons mentioned include a weak supply chain and excessive bureaucracy.

http://www.thecitizen.co.tz/newe.php?id=14297

Welcoming the new Saviours- Good luck- you’ll need it.

Development in Africa is getting a new lease of life- after decades of policies and billions of dollars by the World Bank and IMF with varying success. Efforts by NGOs basically turned parts of sub saharan Africa into a big helpless dependent- foreign aid accounts for up to half or more of some African countries' national budgets. Even though one can point to recent economic growth indicators, fact remains, the benefits have occurred to a few and not a majority of Africans. In many places, such as Tanzania, there are little signs of a growing middle class and a huge informal economy still exists. The main coastal city of Dar es Salaam contributes an estimated 85% of Tanzania’s economic activity yet with about 5M people, barely an 8th of the country’s population.

But now a new set of players are getting into the development game bringing a new set of rules with the promise to save Africa. Call it “development 2.0” we now have microfinance banking institutions lending to small scale entreprenuers and targeting women, new social enterprises, foundations and “philanthrocapitalists” with huge fortunes to spend and a new determination and focus. With Western countries reeling from a recession, China, India and the middle east are becoming more and more active in African development as they seek partnerships of mutual interest and bring new models and approaches to providing aid and investment to Africa. Even western donors such as the USA are demanding more transparency and accountability before aid is disbursed and in many cases playing favourites with African countries that “behave” and are making efforts in stamping out corruption.


Suddenly the African development landscape looks different- major recessions like the one we are experiencing creates opportunities for things to be shaken up- consider these points:



People- Brain Drain to Brain overflow

- Migrant workers are not only sending less in remittances back to their homeland developing countries due to the recession but may also return home and use the skills and any leftover capital to build real businesses and bring much needed employment opportunities in the private sector. From former London investment bankers joining African banks or raising development funds for small businesses to Silicon valley engineers building the next ISP or working on mobile banking.

- Talented new graduates from the top schools with less employment opportunities in their countries are turning to emerging markets and considering new career paths- Suddenly a team consisting of Chinese, European and American students in an energy or healthcare startup in Africa is not that far fetched.
I recently met two young American women working in an Tanzania energy startup who are living in the less afluent myananyamara suburb rather than the posh ex-pat heavy areas of Dar es Salaam's oysterbay- their experience and perspective will be very different if they lived in and brought families to the oysterbay peninsula as is the case with many aid development workers seeking a "cushy utopia" lifestyle and risk becoming out of touch with the people thy are trying to save.

Money new sources

- Traditional donor countries are slashing development budgets to focus on their economies- recipient countries are now forced to look for new funding sources from bond issues in capital markets to investments from china and the middle east.

- Private Equity and other investment funds looking for the next growth sectors and markets are now seriously considering investing in Africa.

- Philanthrocapitalism donations have been increasing to Africa. For instance the Gates foundation is disbursing up to $1B a year thanks to the Buffet contribution that is kicking in this year. All this money is good, but makes ZERO difference if the reciepient countries do not have the capacity to absorb these funds due to widespread corruption and incompetence on the ground.

These are just a few areas that will bring both opportunities and challenges to the next phase of African development. While many organizations' marketing and PR outlets will highlight on their successes (they have to in order to raise funds and generate interest), I want to bring balance in the discussion on what is going directly on the ground with development 2.0, I also want this blog to be a discussion resource to anyone new or considering moving to Africa to join this movement- I welcome comments and guest postings. Be warned that this is not the place to just trumpet your successes- I will take a skeptical tone and ask tough questions. So you want to save Africa? There are many reasons why 40+ years of aid has not worked, some of those reasons may form the same obstacles in the next 40 years no matter how novel the approach- the fact is change, especially originating externally, is hard.