NB Financial Innovation

February 12

Matt Flannery and Premal Shah

Kiva Responds: The famed microlender replies to Hugh Sinclair’s scathing critique

At Kiva, we are committed to transparency as our highest value. We constantly strive to gather and share a huge amount of data about Kiva and how it works online, so that we can get regular feedback from our community and others about ways that we can grow and improve.

Sometimes though, the data we release can be misunderstood or misinterpreted. This happened several times in a recent article on NextBillion by Hugh Sinclair. We appreciate the opportunity to set the record straight below, as we respond to some of the inaccurate statements.

Sinclair: “[A]ccording to the 2012 financial statements $82 million is sitting in a U.S. bank account, and guess who earns the interest on this tidy ‘buffer?’”

This is simply untrue, and is based on a misreading of our financial statements.

We release our financial data annually, and at first we couldn’t figure out how Sinclair reached the $82 million figure. Then we realized that if you add up four of the 2012 balances in the “Kiva User Fund” accounts you end up with $82 million.

Here is the breakdown of that $82 million:

  • At the end of 2012, Kiva had $35.3 million in loans outstanding (loans that were already in the field, not in any of our bank accounts).
  • In addition, there was $11.5 million in cash from Kiva lenders scheduled to be sent to the field within the month (for efficiency and cost savings, Kiva transmits funds once a month to the field).
  • There was also $3.9 million in cash held as Kiva Card values not yet redeemed by recipients. (Kiva Cards are usually purchased as a gift for the holidays, so they’re likely to not yet be redeemed at the end of the year.)
  • There was also $31.3 million in cash for Kiva Credit value, which is the total of user cash balances.

It looks like Sinclair added those numbers up and implied that we are holding onto the funds for our own benefit. The amount is wrong; the innuendo is wrong.

Some of this cash is out in the field, some is locked up in Kiva Cards, some is Kiva user balances yet to be directed, and some is scheduled for release to the field. If you are a Kiva user, you know that we are constantly reminding you to lend your balance so that the funds are not idle and can be used in the field.

Note the “Kiva User Funds” is an escrow-like account. It is a FDIC insured, low-yielding “For Benefit of Others (FBO)” account that we administer. We set up this FBO account so that Kiva users’ funds (meant for lending) are fully separate from Kiva’s operational funds as a nonprofit (Kiva Microfunds) and protected.

Sinclair: “[G]uess who earns the interest on this tidy ‘buffer?’”

Actually, Kiva only earns nominal interest (less that 0.5 percent) on the balances in lenders’ accounts. That’s because, to protect lenders, we operate our users’ funds like an escrow account and do not invest it to earn interest. The cash sits fully liquid in a Wells Fargo demand deposit account.

In 2012, Kiva received about $50,000 in interest on this FBO account. That interest helped to pay for things like transaction fees to transfer those funds to the field (and in 2012, the transaction fees on these funds were about $30,000).

So in total, Kiva earned roughly $20,000 from the bank, net of transaction fees. This reflects our philosophy that we shouldn’t put our lenders’ capital at risk, and instead should be as conservative as possible in safeguarding those funds.

Sinclair: “Despite most staff being volunteers, Kiva managed to spend $0.13 for every $1 loaned. Typical specialized microfinance funds will make a modest return with a 2 percent annual management fee from which to cover all costs – making them 6 or 7 times more efficient than Kiva in getting money from investor to poor person.”

Sinclair compares Kiva to a typical investment fund when he discusses our financial efficiency. In doing so, he misses our larger social aims. Unlike a typical investment fund, we aim to engage and educate individuals, creating a simple way to connect with someone across the planet and advance a market-based approach to poverty alleviation. Through this experience, our lenders supply loan capital with altruistic motivation. This 0 percent interest “patient capital” can uniquely fill a critical gap between limited pools of donor capital and abundant pools of risk-averse commercial capital.

Like any mission-driven organization, we are aspirational. We set lofty goals, and are relentless about improvement. Some elaborations:

  • Unlike an investment fund, Kiva operates a number of programs based on community outreach and education. For instance, we operate Kiva U, where K-12 teachers can download poverty-focused curriculum to help their students think critically about global issues. One month after Kiva U’s launch, +1,000 curriculum were downloaded. And over 3,000 schools and universities have set up Kiva lending teams with countless student leaders engaging in global issues for the first time. Engaging young people is not the most efficient way to raise capital, but we believe it’s an important lever point in long-term social justice.
  • Unlike an investment fund, Kiva seeks to place capital where commercial investment funds won’t go due to perceived risk or cost. For example, commercial investors fear post-conflict / fragile states like Iraq because of country risk and information asymmetry. Kiva has three active partners in Iraq and several other conflict regions. It costs more, but Kiva actively seeks out, diligences and trains Field Partners in these difficult environments because our lenders are impact first and this is where we can be most catalytic. To the best of our knowledge, Kiva invests in more post-conflict African MFIs than any other international investor. Our hope is that over time, such early investments at the “risk and cost frontier” de-risk the investment profile for more conservative investment funds, paving the road for impact at scale. We are proud to be part of that effort and check out Kiva Labs for more on this.
  • Our expenses in 2012 were around $14.2 million. Our costs were covered through donations – not through charging fees or interest. And during 2012 our lenders made about $111 million in loans. This means about $7.8 was sent to the field for every $1 we spent on expenses that year. In 2013, the ratio was above 8:1, and in 2014, we’re targeting 9:1. That’s good, but we know we can do better. By 2015, we want to get this ratio to 10:1 and continuously improve operating leverage.
  • Kiva does not make money from the loans we facilitate. Instead, we depend upon donations. The majority of Kiva donations are provided by our lenders, who “tip” us on top of the loans they make to borrowers. They do this because they believe in Kiva and what we’re doing, and recognize it takes infrastructure to make this work in 70-plus countries. A large majority of the rest of our donation income is provided by foundations, who encourage us to create innovative programs to serve the poor more effectively (e.g. Google.org funding of Kiva Labs).

Kiva works to maintain its overall efficiency and effectiveness. Many have validated this, including Charity Navigator, which gives Kiva its highest rating.

Sinclair: “[M]any [field partners] are now deserting Kiva (as shown by their high number of inactive partners).”

Sinclair makes it sound as if there is a mass Field Partner exodus at Kiva due to high operational cost. Again, simply untrue. Each year, we retain the significant majority of Field Partners and add several new ones. And when Kiva no longer works with a Field Partner, it’s typically for reasons other than operating cost.

For example, as issues of mixed impact and over-indebtedness in the microfinance industry emerged, Kiva developed an intentional strategy to ask mature MFIs to either exit Kiva or reorient how they use Kiva. Our goal in reorienting mature MFI’s was to focus the internet community’s low-cost patient capital at expanding microfinance’s risk and cost frontier – rather than subsidizing an over-crowded market.

Since then, Kiva’s mature MFI partners have responded by creating over 60 new loan products representing nearly a third of Kiva’s outstanding loan portfolio. The internet community’s patient capital now provides more room to test student loans with longer tenures or agricultural loans with delayed repayment schedules. If the repayment rates are high, these new loan products will be mainstreamed and more will be better served. As Bill Gates recently stated, philanthropy is most catalytic when it can crowd in the private sector.

Sometimes we exit partnerships because we’ve identified and verified fraud or misreporting of data. We communicate these findings on our website. You can see a list of all partners – past and present – here http://www.kiva.org/partners; you can click on any partner link to see its current status and any recent updates.

Sinclair: “Institutions such as Zidisha may be a step in the right direction, actually doing what Kiva claims to do.”

We agree that direct loans to borrowers may be a step in the right direction.

Two years ago, Kiva launched an experiment in Kenya and the U.S. called Kiva Zip (KivaZip.org), to directly lend to borrowers at 0 percent interest over the internet (e.g. PayPal) and via mobile phones (e.g. M-PESA). We transfer the funds raised directly to the borrowers.

The key innovation we’re developing is “social underwriting” where people and organizations can vouch for a borrower’s character online. “Social underwriting” qualifies borrowers without a formal credit history for a lower interest rate loan versus their market alternatives.

The best thing about this model is that cost savings from leveraging existing social capital and new technologies can be passed on to the borrowers, which helps enable our 0 percent interest loans. The downside is that the borrowers receive less hands-on support.

In Kenya were nearing 2,000 borrowers served with strong demand, and a repayment rate of 92 percent. In the U.S., lenders have supported about 500 people with an 87 percent repayment rate. We’re still very much at the beginning stages of this experiment but are learning a ton.

We’re directly measuring impact through survey data over SMS, which is very promising so far. And later this month, researchers at Innovations for Poverty Action in Kenya will start preliminary research towards a full Randomized Control Trial. Inspired by GiveDirectly, we wonder if there’s a way to reach the same population with extremely low-cost, flexible repayment loans that would create similar social impact on a more sustainable basis. Time – and a lot of work – will tell.

Sinclair: “Kiva has started lending in the U.S, charging Americans perhaps 10 percent interest.”

Just as Kiva does not charge interest to borrowers outside of the U.S., Kiva does not charge any interest at all to American borrowers.

  • As mentioned above, Kiva is piloting a new program called Kiva Zip to explore new avenues to bring down the costs of borrowing. Kiva Zip borrowers receive 0 percent interest, no fee loans. This pilot is happening in the U.S. and Kenya.
  • Kiva also has field partners in the U.S. and those partners are permitted to charge fees/interest to borrowers. Just like with our non-U.S. partners, Kiva itself receives 0 percent interest from these field partners.

In the eight years since we started, we’ve worked to raise awareness, connect people and spread access to capital and opportunity. Our community has made solid progress, but this project is far from complete.

We know that poverty is multidimensional, that microcredit is just one tool, and that it is far from being perfected. Along those lines, we’re working to make microcredit more impactful by reducing borrowing costs, increasing repayment flexibility, pairing it with high impact interventions in agriculture, water and sanitation, health, education, clean energy and more.

We appreciate the opportunity to set the record straight on Kiva and respond to some of the factual inaccuracies in the original article.

Thanks for reading.

Matt Flannery is the co-founder and CEO, and Premal Shah is the president of Kiva.

Editor’s Note (March 17, 2014): In the weeks after this post was published, Kiva requested an addendum to their original response post. The additional content is below.

In February, we published a response on NextBillion correcting some of the most egregiously inaccurate statements about Kiva published in an earlier column.

There were some additional points raised in the column, many of which also distorted the truth. So we wanted to take this opportunity to further set the record straight.

Kiva’s Impact

We have found several promising avenues where academic studies and randomized control trials have suggested impact through microcredit, and are working with MFIs and non-profits to make them reality. It’s a form of Microcredit Plus, and it allows us to build on the fundamentals of microcredit while adding additional offerings and services shown to have an impact. More here: http://blog.kiva.org/faqs/kivas-impact-qa

Interest Rates

Kiva does not receive any interest or fees from borrowers. Kiva’s Field Partners do usually charge interest though, and the average portfolio yield of our microfinance partners is ~35 percent. In addition, our Field Partners’ average return on assets is negative (i.e. on average, they are not covering their costs without grants and other subsidies).

Interest rates are also heading down. Kiva has added more than 30 new partners that are offering 0 percent interest loans as part of our Microcredit Plus initiative. The average interest rate of these 80 Microcredit Plus partners is 10.4 percent. And in addition, Kiva has an interest-free loan program called Kiva Zip, where people can make 0 percent loans directly to borrowers in Kenya and the U.S.

Interest rates are a concern we take extremely seriously here at Kiva. Here are the facts on interest rates and Kiva, and how we work to regulate the interest rates and fees paid by Kiva borrowers: http://blog.kiva.org/faqs/interest-rates-qa

Portfolio Yield

At Kiva, we want to make sure that our lenders can understand the sort of interest rates and fees that borrowers are paying. Here are some FAQs on why we use portfolio yield (audited through MIX Market, when possible), and our future plans for evaluating the effectiveness of portfolio yield as a proxy for interest rates: http://blog.kiva.org/faqs/portfolio-yield-qa

Direct Loans

We require that all of our partners upload their loans to Kiva within 30 days of disbursal. In fact, the average time between disbursal and posting on the website in 2013 was just 19.8 days.

Additionally, in 2011 Kiva launched Kiva Zip, which offers direct peer-to-peer loans at 0 percent interest rate to borrowers in Kenya and the U.S. Once a loan is fully funded by Kiva Zip lenders, Kiva sends the loan amount directly to the borrower.

You can read more about the connection between Kiva lenders and borrowers here: http://blog.kiva.org/faqs/direct-loans-qa

We will be publishing more on Kiva’s impact and new initiatives on our site in the months ahead.

Financial Inclusion
financial innovation, financial products, microcredit, microfinance, poverty alleviation