The uses of Kiva
In the wake of my blog entry last month saying that people shouldn’t invest in microfinance, I had the opportunity to meet yesterday with Premal Shah, the president of Kiva. Kiva is an interesting case, and I don’t consider Kiva’s lenders to be microfinance investors — not least because they get no interest on their money. The best-case scenario is that they’re paid back what they lend, and the worst-case is that they lose it all. That’s not much of an investment.
With Kiva, the interest is more literal — they take a real interest in the individuals to whom they’re lending. That’s why Kiva loans are structured as loans to individual borrowers, rather than as loans to the local microlenders. Lending to microlenders is the way that most microfinance finance is structured, and it’s the logical way of doing things. But there’s less human-as-opposed-to-financial interest there. At Kiva, says Premal, “What makes it all work is the story engine.”
Premal says that when visitors to kiva.org lend money, the rate of return they’re looking at is social impact, rather than anything financial. That makes sense. And indeed they have a much greater risk appetite than most socially responsible investors: they’re reasonably happy to take modest losses, especially when it’s a result of circumstances outside the borrower’s control, such as exchange controls imposed by the government in question.
Given the fact that Kiva has a greater risk appetite than most investors, it tends to work at the riskiest end of the microfinance spectrum — places like Iraq and Liberia. That’s pretty cool. But it does share a couple of structural problems with the world of microfinance investors more generally. The first is that there’s too many dollars and too few microlenders: what’s really needed is not more money, but more people in rural areas willing and able to lend it.
The second problem is the way in which much microfinance investment is at heart a gussied-up carry trade: investors fund in dollars and then lend out, at very high nominal interest rates, in foreign currencies. Kiva has started to address this problem with an opt-in scheme whereby lenders take FX risk after the first 20% of local-currency devaluation, thereby preventing microlenders from having to pay back, in local-currency terms, much more than they borrowed. It’s a start, but I don’t like the way that microlenders have to opt in: it should rather be opt-out, since the scheme is free. The microlenders who opt out will have privileged access to the minority of Kiva users who don’t want to take any currency risk, but those users shouldn’t really be lending money to foreign-currency borrowers in the first place.
My feeling is that where Kiva works best is in giving ordinary Americans a real connection to policies and people in far-flung countries; it’s also probably the best way in which microfinance lenders can take advantage of dollar-denominated funding. That said, such microlenders should always look for grants before loans, and for local-currency funding before anything in dollars. So Kiva, while not necessarily a last resort, should maybe be the second-to-last place they look for capital.
Update: I’ve realized this was pretty unclear in that I use the term “lenders” to refer both to the Kiva visitors, lending in dollars, and to the local microlenders, lending in local currency. So I’ve changed all the “lenders” to “microlenders” where appropriate. Of course the Kiva visitors can be considered microlenders themselves, but that just gets confusing.