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.
