Matt Flannery, CEO of Kiva.org made a request for support this week. Apparently there is a competition by AMEX where the Kiva is in the running for the $1.5M top prize.
I was surprised by his claim that the prize would help generate $12M in new funds for the impoverished. He is basing this off of his historical operating expense to funds lended ratio which just happens to be 1:8. This is by no means an important number... it has zero significance on the future of his business. So, let’s say the prize happened to be $10M... will new lenders follow by bringing $80M of savings into the Kiva marketplace, of course not. Let's be realistic, this award will not do much for the Kiva marketplace besides paying some salaries and keeping the boat afloat a while longer.
I have a few issues with a model like Kiva's. First, the only value they are bringing to the table is increased liquidity in the microcredit marketplace. They are a middleman. They spend a lot of money in order to collect funds from savers in the west and pass them out to microfinance institutions in impoverished countries who actual make and administer the microloans. In general, I think middlemen are only present in inefficient markets. Either Kiva will eventually be squeezed out, or their partner institutions in the impoverished countries will be.
My second issue is that they seem to encourage less efficient micro-finance. Why are they returning less than 100% of investors money. Kiva claims the borrower default rates are less than 2%. We know the interest rates being charged to the entrepreneurs are very high... what am I missing here. How are they screening and controlling the micro-finance institutions they give (other people's) money to? How are incentives properly set up for Kiva and their partners giving away (other people's) money to do it well? Yes, I understand a lot of people are viewing the money they give on Kiva as charitable donations and are happy to get anything back. But it doesn't need to be this way! Think of how many more entrepreneurs would receive the microloans they so desperately need if Kiva could get the system working well and actually return all or more of the lenders' money.
My last issue is that this model is not sustainable. It requires the support of donations to keep it running. All the money they spend in running the website and paying salaries could do more benefit for society if it was given directly to those actually needing microloans. If donations dry up (which will happen when a more efficient mechanism is in place), this model cannot be sustained.
I hope that Kiva is able to adapt their model to be more efficient and transparent. Microcredit is an amazing thing as I spoke about in an earlier post. It just needs to be done well.
Thursday, September 25, 2008
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4 Comments:
Very interesting. Are there any other alternatives to Kiva out there where the small contributor can participate and the efficiency is better of that company?
Good question... actually, not really. Kiva has done a very good job allowing anyone to put small amounts of money to work in developing countries. In fact, they are probably less inefficient than most places in these countries where you can make donations.
I think in the future, we'll see even more efficient ways to support entrepreneurs in developing countries. The biggest problem is financial regulations. Kiva actually gets around most regulations by not providing investors with returns on their money. In this way, they are running a charity more than anything else. As is the case with any charity... there are middlemen getting in the way and taking their respective cuts.
Yes, actually, but their websites aren't as pretty. For example:
http://www.rotarianmicrocredit.org/
Thanks skipernicus... looks like a model identical to Kiva.
The real issue with this type of model is that the money goes to the middleman (the mirco-finance institution aka MFI) with little to no strings attached.
These MFI's are in the business of making micro-loans. They charge HUGE interest rates to the borrowers. They use their own creative ways to collect the repayments. Why are we supporting them with all this FREE cash? Especially because it comes with no real oversight.
It is these MFI's that are the real winners from all this micro-finance hype in the West.
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